How you can lock in payouts early in mutually exclusive markets.
Summary
A set of positions can have a guaranteed payout when at least one of them will be correct at settlement regardless of the real-world outcomes. Netting allows you to access these guaranteed payouts the moment you enter the positions.
On Kalshi, netting always happens when you buy both Yes and No in a single market. It also happens in the case of collateral return. Usually, that’s when you buy the No side in multiple markets in a mutually exclusive group.
Due to collateral return, you may see changes in your invested value and available funds while trading that differ from what you expected. For example, you might expect to pay $0.30 from available funds and gain $0.30 in invested value after a trade, but instead gain $0.40 in funds and lose $0.40 in invested value. The net change to portfolio value will still be 0 immediately after any trade.
What is collateral return?
Collateral return is a mechanism that affects trading in mutually exclusive market groups. The markets do not need to exhaust every possible outcome. The key here is that a maximum of one of these outcomes can resolve as “Yes”. Some examples might include
The group “Who will be confirmed as the Secretary of State?” with markets for Hillary Clinton, Rex Tillerson, and John Kerry
The group “Who will win “Best New Artist” at the 2022 Grammys?” with one market for each nominee
The group “When will the [XYZ] bill be signed into law?” with one market for the bill passing in February and one market for the bill passing in March
In a mutually exclusive market group, you can achieve locked-in profits by buying the non-mutually exclusive sides of multiple markets. That is, the maximum amount you can lose at settlement (your total exposure) may be less than the amount you put in. In that case, we pay you back the difference immediately! That’s collateral return.
Example: Consider the hypothetical case of a mutually exclusive market group “Who will be confirmed as the Secretary of State?” with the markets
“Will Hillary Clinton be confirmed as Secretary of State?”
“Will Rex Tillerson be confirmed as Secretary of State?”
“Will John Kerry be confirmed as Secretary of State?”
There can only be one confirmed Secretary of State, so there are only four possibilities at settlement: exactly one of the three markets resolves to Yes, or all three markets resolve to No. You buy No in “Hillary Clinton” for 60¢ and No in “John Kerry” for 70¢. You've invested a total of $1.30, but you'd be guaranteed to be paid out $1 by at least one of your positions:
If Hillary Clinton is confirmed, your John Kerry position will be correct.
If Rex Tillerson is confirmed, both your positions will be correct.
If John Kerry is confirmed, your Hillary Clinton position will be correct.
If none of the three are confirmed, both your positions will be correct.
Therefore, the maximum amount you could lose at settlement is $1.30 - $1 = $0.30. Instead of taking the full $1.30 of your available funds, we take only $0.30 and mark down your position value by the returned $1, leading to an invested value of $0.30. If you hold both contracts until settlement, then you will receive $1 if both your positions were correct (neither Hillary Clinton nor John Kerry is confirmed) and $0 if one of them is.
It’s important to remember that collateral return applies only to trades involving the non-mutually exclusive sides of mutually exclusive multi-market events. In the above examples and in most cases you’ll see on Kalshi, it would apply only when buying and selling No positions. Market groups eligible for collateral return will be clearly marked on Kalshi.
How is collateral return helpful?
Collateral return is beneficial for three reasons:
It ensures that you're not overcollateralized. Kalshi makes sure that it has full collateral to pay every claimant out for correct positions at settlement. Collateral return ensures that you don't end up having more dollars locked in markets than you can possibly lose.
It lets you lock in profits in certain scenarios without having to sell your positions.
It encourages efficient market pricing across sets of related markets as traders are incentivized to buy positions that allow for free profit through collateral return.
How does collateral return affect trading?
Collateral return may lead to lower-than-expected decreases in your available funds and increases in your invested value when you buy contracts in a mutually exclusive market group. The reverse is also true when you sell contracts in these groups: your available funds may increase less than expected or even decrease, and your invested value may decrease less than expected or even increase. The net change to your portfolio value will stay the same: trades involve an increase in one of invested value or available funds and an equal decrease in the other, and thus do not affect total portfolio value.Example, cont.: Recap: you bought No in “Hillary Clinton” for 60¢ and No in “John Kerry” for 70¢, and paid a total of $0.30 due to collateral return and your total invested value is $0.30. Now, suppose that the market for John Kerry has moved to 90¢ for No while the Hillary Clinton market is unchanged, increasing your invested value to $0.50.
If you sell your No on John Kerry now, you might expect your invested value to decrease and your available funds to increase by 90¢. But in fact, your total invested value will increase from $0.50 to $0.60, the value of your Hillary Clinton position. Your available funds will decrease by 10¢, the difference between the original $1 locked-in profit you already received from collateral return and the 90¢ you receive for selling your John Kerry position.