Some prediction market contracts lose value with every passing day. Others don't. Understanding which type you're trading — and why — is one of the most important distinctions in event contract trading.
On the surface, all prediction market contracts look the same: binary instruments that resolve to $1 or $0. But beneath that uniform surface lies a critical distinction that most traders miss — and it changes everything about how you should think about timing, sizing, and strategy.
Type A: "Will X happen by [date]?" — A contract with a deadline. If X hasn't happened by the deadline, the contract resolves No ($0). Every day that passes without X occurring is a day closer to $0. Time is the enemy of the Yes buyer.
Type B: "Who wins [event]?" — A contract where the event is guaranteed to happen. Someone will win the election. Someone will win the Bundesliga. The passage of time doesn't inherently push the price in either direction — only new information does.
This distinction is not cosmetic. It determines whether your contract has theta — time decay — and that changes your strategy fundamentally.
A "Will the Fed cut rates by June?" contract at 45¢ behaves remarkably like a call option. Every FOMC meeting that passes without a rate cut is a decay event — the equivalent of a day of theta burn. If there are four meetings between now and June and the first passes with no cut, the contract doesn't just sit at 45¢. It drops — even if nothing else changes — because there are now only three remaining chances for the event to occur.
The analogy to options is precise:
| Concept | Options | PM "by date" contracts |
|---|---|---|
| Theta | Daily time decay of option premium | Daily probability decline as deadline approaches without event occurring |
| Expiry | Option expires worthless if OTM | Contract resolves $0 if event hasn't happened by deadline |
| Acceleration | Theta accelerates near expiry | Decay accelerates as remaining catalysts shrink |
| Intrinsic value | In-the-money portion | None until event occurs (contract is either $0 or $1) |
| Time value | Premium above intrinsic | The entire contract price is time value until resolution |
The key insight: if you're buying Yes on a "by date" contract, you are long theta. Time works against you. Every quiet day — every day without the triggering event — erodes your position. This means:
You need a catalyst soon. Buying "Will X happen by December?" in January gives you 11 months of potential catalysts. Buying the same contract in November gives you one month — and the theta is screaming.
You can sell theta. If you believe the event is unlikely and the market is overpricing the probability, selling (buying No) lets you collect decay. Every uneventful day drips money into your position. This is the prediction market equivalent of selling covered calls.
Trading at 40¢ in January. Four FOMC meetings remain (Jan, Mar, May, Jun). If January passes with no cut, the contract has lost one of four chances. Assuming equal probability per meeting, the contract should drop to roughly 30¢ — a 25% decline from one non-event. If March also passes: ~20¢. This is theta decay in action. The Yes buyer needs the event to happen faster than time erodes the position.
A "Who wins the 2026 World Cup?" contract behaves completely differently. The World Cup will happen. Someone will win. The passage of time doesn't push any contract toward $0 — it just brings us closer to the resolution event, where exactly one outcome pays $1.
These contracts have no theta. A "Brazil wins the World Cup" contract at 15¢ in January won't decay to 10¢ in March just because time passed. It moves only on information: a key player injury, a qualifying result, a managerial change, a draw reveal.
The trading implications are different:
No urgency. You can hold indefinitely without decay eating your position. Capital lock-up is a cost (opportunity cost), but the position itself doesn't deteriorate.
Information-only price drivers. Price movements are discontinuous — they happen when news breaks, not gradually. This makes pre-resolution trading (article 305) more about catalyst timing than time management.
No theta selling opportunity. You can't generate income from time decay because there isn't any. The only way to profit from No-decay contracts is directional — buying underpriced contracts or selling overpriced ones.
Many contracts sit between these two types. "Will Dortmund finish in the top 4?" has a fixed resolution date (end of season) but the probability is continuously updated by match results. Each matchday is simultaneously a potential catalyst (win = probability up) and a theta event (one fewer remaining match to accumulate points).
This creates a compound dynamic. If BVB is sitting in 5th place with 8 matches remaining, time works against the Yes buyer in two ways: fewer matches to close the gap (theta) and increasing mathematical difficulty (the gap represents a larger fraction of remaining points). But a single win against a direct rival can reverse both effects simultaneously.
The practical takeaway: for these compound contracts, your position sizing should account for both the probability of the event and the rate at which time is eroding the opportunity. A 40¢ contract with 10 matchdays remaining is a fundamentally different position than a 40¢ contract with 3 matchdays remaining — even though the price is identical.
For decay contracts (Type A):
If buying Yes: enter early, when time value is highest and the number of remaining catalysts is large. Your worst enemy is a slow drift toward the deadline without the triggering event. Use tighter position sizes (more conservative Kelly fractions) because theta is a structural headwind.
If selling (buying No): this is the prediction market equivalent of premium selling. You profit from the passage of uneventful time. The ideal setup is a contract where the market overestimates the probability of the event occurring within the timeframe. Let theta work for you.
For no-decay contracts (Type B):
Timing matters less than price. Since there's no theta erosion, the question is purely whether the current price underestimates or overestimates the final probability. You can afford to be patient — enter when the price is right, not when the clock is ticking.
Portfolio management is different. No-decay contracts tie up capital longer but don't require active monitoring for theta. Decay contracts need regular reassessment: is my remaining time value still worth the capital allocation?
This article sets the stage for article 307 (The Greeks for Prediction Markets), where we formalise these concepts. Theta, as described here, is one of five Greek-analogues that help you think systematically about prediction market positions. The others — Delta, Gamma, Vega, and Rho — each capture a different dimension of your exposure.
The core insight from this article: not all prediction market contracts are created equal. Before you trade, ask yourself: does this contract have theta? If yes, time is either your ally (selling) or your enemy (buying). If no, forget about time and focus purely on price.