Since their creation a few centuries ago, stock markets have undergone an incredible transformation. Market participants worldwide began trading basic commodities and slowly introduced new and better ways to bring a free market economy to everyone. In the last few decades, investors have been introduced to new financial tools such as foreign exchange, derivatives, options, futures, etc. In this article, we will focus on a very recent development in futures trading. It requires very little knowledge or capital and is accessible to anyone. I first discovered event contracts on my Instagram feed. Event contracts aren’t available in every country. Luckily, they can do so in the U.S. This article will elaborate on what event contracts are and how you can trade them. Let’s begin.
What are Events Contracts?
Event contracts are a fairly new and very simple type of investment. Investors face a question, whether financial or not, and they must answer it with Yes or No. Next, they choose the number of contracts they purchase at the stated price. The contract can be for an event occurring during the day or shortly.
The contract price fluctuates depending on the difference between the Yes and No answers. The potential gain depends on whether most investors answer Yes or No.
How far can event contracts go? The market potential is enormous if we compare them to their older peers. Grain futures began in 1905 and are now worth over $7T. Commodities trading began in 1930 and is now worth over $20T. As long as event contracts are secure and traded in a free market, they will continue growing.
The next section will look at companies operating in the space. They seem to have a first-mover advantage in the US and are looking to grab as many investors as possible. Let’s take a more in-depth look at both platforms.
CME Group (NASDAQ: CME)
The Chicago Mercantile Exchange (CME) is the world’s largest financial derivatives exchange. Its asset classes include crypto and other currencies, interest rates, agriculture, energy, metals, and other futures. The exchange’s revenue increases yearly thanks to its constant innovation and product diversity. Last year, the CME launched its event-based futures. The CME is giving the following characteristics to this new investment class:
Enhanced granularity: There is limited market exposure for investors. The cheapest contract is $0.25, and the most expensive will be worth $20, making it available for all types of investors.
Compressed time horizon: The futures contract can expire in hours or a few days, making it easy for investors to trade frequently on this platform.
Collateralized: All positions are based on real assets.
Defined risk to reward: Investors clearly understand market sentiment and potential payouts. They are low-risk and easily understandable.
What about the markets? Which asset classes are on the list for investors to choose from? The list is short, but the scope will expand as event contracts get more popular.
Equities: Large/mid/small-cap equities, various e-mini contracts, and other equities covering most of the US stock market.
Energy: Only the West Texas Intermediate (WTI) crude oil and the Henry Hub natural gas contracts exist. Hopefully, more energy contracts will become available.
Metals: The same limited availability pertains to metals. The CME will only offer gold, silver, and copper.
Currencies: As for currencies, forex traders will have access to EUR/USD as the only pair available. As of March, CME is offering Bitcoin futures.
The company offers services to many trading platforms, such as CQG, Ninja Trader, Dorman Trading, Ironbeam, etc.
Kalshi
Market leaders aren’t the only ones interested in event contracts. Like in most industries, many small players will also attempt to steal some market share from the big boys.
Since event contracts are a relatively new industry with little competition, attracting as many investors as possible and as fast as possible is important. Kalshi is a perfect example. The company was founded in 2019 and quickly raised $30M from Charles Schwab, Henry Kravis, Neo, and Sequoia Capital.
The beta version was launched to the public in June 2021. It is presently available to all Americans. The Commodities Future Trading Commission (CFTC) approved the platform and is the first on the market.
Kalshi’s Advantage
How is Kalshi different from CME? Its topics are much broader, which can reach a much wider audience. Investors on Kalshi’s platform can invest in topics such as economics, media, entertainment, international affairs, weather, public health, and the stock market.
Furthermore, the platform has different options for various types of investors. The platform differentiates between new, experienced, and institutional traders. More knowledgeable investors have access to hedge residual risks, market-making algorithms, and much more. I’m not done yet.
Kalshi allows investors to cash out in two different ways. First, if a position is successful, the investor receives $1 for every contract invested. Second, the investor can sell their position before maturity, either at a loss or for profit.
Event Contract Example
Let’s look at a hypothetical example of Kalshi’s climates section. Will a hurricane of category 1+ hit New York City by the end of 2023? One Yes contract costs 4 cents, while a No contract costs 97 cents.
If an investor purchases 1000 Yes contracts for $40 and a hurricane does hit New York City by the end of 2023, the investor makes $1000 (1000 x $1), a $960 profit.
This is just an example of how diversified the platform is. I have little doubt that Kalshi will keep growing and create more diversified events to reach even more investors. It is a very exciting category of investments, and more platforms should invest in it.
Note: Kalshi is only available to US investors for the moment.
Tradeovate
Last on today’s list of event contracts platforms is Tradeovate. The platform is very similar to what the CME group released.
For the moment, Tradeovate allows investors to trade the following positions: e-mini S&P 500, Bloomberg US large cap, Micro Bitcoin, Euro FX, Japanese Yen, British Pound, US T-Notes for 5, 10, and 30 years, gold, silver, copper, crude oil, natural gas, gasoline, sugar, coffee, corn, live cattle, lean hogs, and feeder cattle futures. There are more options, but they are still limited.
Note: Tradeovate is not available to Canadians.
Final Thoughts: Event Contracts
To conclude, event contracts are a new investment opportunity for investors of all levels. One important piece of advice for everyone is to review the fees for these types of trades. These new platforms need to make money.
As more platforms appear, it is important to choose the one with the most diversified event contracts and the least types of fees. Down the road, your broker will offer event contracts. It is undeniable that they are gaining popularity among traders of all levels.
If you want to learn more about profiting from the stock market, head to our free library of educational courses. We have something for everyone, including trading options for those with small accounts.
Frequently Asked Questions
What Is Included in an Event Contract?
You must answer yes or no questions based on an event you want to invest in.
What Are Event Based Contracts?
They are small same-day expiring contracts that allow you to trade based on how you think a future event will go.