How to Calculate a Prediction-Market Arbitrage

Step 1 — Combined cost

Combined Cost = Price A + Price B

Example: $0.52 + $0.43 = $0.95

Step 2 — Gross spread

Gross Spread = $1.00 − Combined Cost

Example: $1.00 − $0.95 = $0.05 → 5.26% of capital ($0.05 / $0.95).

Step 3 — Fees

Model each platform's fee as a percentage of capital deployed on that leg, blended:

Estimated Fees % = (Fee A % + Fee B %) / 2

Example: (0.7% + 0.0%) / 2 = 0.35%... but on a per-dollar basis fees should be weighted by what you actually deploy on each leg. GapWatch weights fees by the real stake per leg.

Step 4 — Net spread

Net Spread = Gross Spread − Estimated Fees

Example: 5.26% − 1.10% = 4.16%

Step 5 — Maximum size and profit

Your size is capped by whichever leg has thinner liquidity:

Max Contracts = min(Liquidity A / Price A, Liquidity B / Price B)

Estimated Profit = Max Size × Net Spread

Step 6 — Annualized return

Annualized = Net ROI × (365 / Days Until Settlement)

A 4.16% net return captured 214 days out annualizes to roughly 7.4% — a fair way to compare a short-term trade to a long-term one. Remember: annualization assumes you can redeploy capital at similar opportunities all year, which is not guaranteed.