A new approach to betting on the direction of the S&P 500 is gaining traction. Instead of the traditional method of buying call or put options tied to specific strike prices in the options market, investors can now use platforms like Kalshi or Polymarket to place "all-or-nothing" bets on whether individual stocks or indices will reach certain price levels. This method is accessible even to novice investors. "It simplifies complex operations to a level everyone can understand, removing the intimidation factor of the market," said Danny Moses, a fund manager famous for his role in "The Big Short," who has promoted Kalshi on his podcast. "That said, you must read the rules carefully and understand what you are trading."
Prediction markets have long focused on sports, elections, and geopolitical events. Recently, however, these platforms have introduced contracts tied to stock prices and key index levels, with trading volumes steadily rising. The mechanism is straightforward: traders buy contracts for $1 each. If a contract is priced at 4 cents, it implies the market assesses a 4% probability of the event occurring. For instance, on Wednesday, a contract on Kalshi predicting the S&P 500 would finish the year in the 8000-8200 range was priced at 4 cents—a $2,190 bet could yield nearly $44,000 in profit.
In contrast, using the traditional options market, spending a $2,190 premium on an 8000/8200 call spread would only be profitable if the index surpassed the lower bound of the target range. The maximum potential profit per contract would be around $20,000, and investors would also need to factor in complexities like volatility and time decay that affect daily profits. The simpler, more intuitive nature of prediction market contracts is highly attractive to many retail traders.
The future development of this market will largely depend on regulatory attitudes. Kalshi's contracts are regulated by the U.S. Commodity Futures Trading Commission (CFTC), while Polymarket, which operates primarily overseas, is largely outside U.S. regulatory oversight. However, the addition of stock market-related bets by these platforms could attract intervention from the U.S. Securities and Exchange Commission (SEC). Currently, it is unclear which regulatory body has jurisdiction over these products, causing concern among some market participants, especially since Kalshi's products are already live.
"The legal definition and economic substance of these products clearly qualify them as securities that should be listed and traded on SEC-regulated exchanges," stated Craig Donohue, CEO of Cboe Global Markets, during a joint roundtable with regulators last September. These platforms are also under scrutiny from federal and state lawmakers for other issues, including potential insider trading and the legality of contracts related to military actions. Several U.S. states have filed lawsuits against such platforms, labeling them illegal gambling operations.
For now, the size of these prediction markets remains relatively small. Since late December, bets on Kalshi regarding the S&P 500's year-end level have exceeded $1 million in trading volume. In the traditional options market, the daily notional trading volume for S&P 500 options expiring on December 31 alone exceeds $1 billion. Nevertheless, a convergence trend between prediction platforms and traditional options markets is evident. Major exchanges like Nasdaq (NDAQ.US), CME Group (CME.US), and Cboe Global Markets (CBOE.US) have already launched binary betting products for indices and financial market events, which itself is an acknowledgment of the model's popularity.
Investment institutions are also beginning to show interest. "I have noticed some clients actively looking at prediction markets, with a cautious curiosity similar to their initial approach to crypto assets," said Stuart Kaiser, Head of U.S. Equity Trading Strategy at Citigroup. "The core issue is market depth. If you're a multi-billion dollar hedge fund, how much size can you realistically trade in a prediction market?"
While prediction markets may not match the depth and liquidity of options markets, the probability forecasts they generate can be remarkably similar. In mid-February, Kalshi contracts implied a 6% probability of the S&P 500 ending the year in the 8000-8200 range. According to Kaiser's data, the probability derived from the over-the-counter derivatives market at the time was about 7%. Supporters argue this closeness reflects the wisdom of the crowd—the collective judgment of ordinary retail traders can approximate sophisticated models built by PhDs.
However, today's prediction markets are no longer purely driven by retail speculation. Market makers serving top-tier trading desks also influence pricing. For example, Susquehanna International Group, a major player in the listed options market with $4 trillion in daily trading volume, also provides liquidity on Kalshi. "The convergence between Kalshi prices and listed options movements indicates a consistent pricing mechanism, supported by institutional capital ensuring reasonable prices," said Vuk Vukovic, Chief Investment Officer at hedge fund Oraclum Capital.
Some industry insiders, however, believe prediction markets are a clumsier tool for betting on price targets compared to established instruments. "Just trade the S&P 500 directly," remarked Marko Papic, Chief Strategist at BCA Research. He compared using prediction markets to bet on the index to "the unnecessary step of calling to ask a girl on a date when she's already sitting right in front of you."
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