Strategy · Mean Reversion
FADE THE FAVORITE
BearishDefined riskIntermediate
Overview
Sell Yes (or buy No) on contracts trading above 90 cents when historical base rates suggest the true probability is lower. Exploits the public's tendency to over-pay for near-certainties.
Setup
- 1.Find a contract trading at $0.90+ Yes.
- 2.Pull the base rate for similar historical events (use FiveThirtyEight, Good Judgment Open).
- 3.Confirm the true probability is at least 5 points below the market price.
- 4.Buy No contracts at $0.10 or less; size to risk 1-2% of capital.
- 5.Hold to resolution; do not panic if the price drifts further toward $1.00.
- 6.Track outcomes over 20+ trades — edge is statistical, not per-trade.
Max profit
$1.00 minus No entry price (e.g., No at $0.08 → max profit $0.92 per contract).
Max loss
Your entry price (typically $0.05-$0.15 per No contract).
Breakeven
Base rate × $1.00 must exceed No entry price.
When to use
On contracts where market consensus has been driven by recency bias or media narrative without underlying base-rate support.
When to avoid
When you don't have base-rate data. On idiosyncratic one-off events with no comparable historical sample.