Strategy · Relative Value

BINARY SPREAD TRADE

NeutralDefined riskIntermediate

Overview

Buy one Yes contract and sell another related Yes contract whose probabilities should move together. Bets on the spread between two correlated events rather than the absolute outcome of either.

Setup

1.Identify two contracts whose outcomes are correlated (e.g., 'Fed cuts in March' vs 'Fed cuts in May').
2.Build a directional view on the spread, not on either outcome alone.
3.Buy the contract you expect to outperform; sell the other in equal size.
4.Set your exit on the spread, not on either leg's standalone price.
5.Cap notional at 5% of PM capital — spreads can still gap.
6.Roll or close before resolution if the spread converges to your target.

Max profit

Magnitude of spread convergence × notional, capped at $1.00 per pair.

Max loss

Up to $1.00 per contract pair if the spread widens fully against you.

Breakeven

Entry spread plus accumulated fees.

When to use

When two related contracts diverge in price beyond what fundamentals justify.

When to avoid

When the contracts are weakly correlated. When liquidity is too thin to enter and exit cleanly.