Economics of a No-Hedge Strategy

A no-hedge strategy observes one market, translates it into an estimated value for a complementary contract elsewhere, and posts a cheaper buy order. It hopes to earn the difference between settlement value and purchase price. Because it does not buy the offsetting reference contract, nothing locks the result.

Reference-to-order calculation #

When the reference contract is the exact complement of the maker contract,

$$fair_{maker}=1-referenceVWAP,$$

$$buyPrice=fair_{maker}-\delta.$$

$referenceVWAP$ is a volume-weighted reference price for the opposite payoff. $\delta>0$ is the required discount or edge buffer. It is a strategy requirement, not the observed bid–ask spread.

If $referenceVWAP=0.35$, then $fair_{maker}=0.65$. With $\delta=0.05$, post $buyPrice=0.60$. If the maker contract's true probability is $q=0.65$, gross EV is $0.65-0.60=0.05$ per filled share.

Where positive EV is supposed to come from #

The intended source is buying below a well-calibrated estimate of expected payoff. The discount must cover fees, slippage, adverse selection, capital lock-up, reference error, and model uncertainty. A positive displayed difference is not sufficient.

Life analogy #

A house appraisal can inform what you offer, but the appraiser does not guarantee your resale price. Buying below the appraisal is an unhedged investment, not arbitrage.

Validity boundary #

The complement formula requires the same event, deadline, resolution source, cancellation and dispute rules, payout unit, and finality. If any boundary differs, fail closed: there is no justified mechanical conversion.

Application to no-hedge #

This entire chapter is the application: treat the reference as probabilistic evidence, $\delta$ as a required margin of safety, the fill as directional exposure, and the final outcome as unresolved until a real exit or settlement.