Definition
Risk-defined
A trade whose maximum loss is known and bounded at entry.
Risk-defined
A risk-defined trade is one where the maximum possible loss is known and bounded at the moment you enter the position. In the context of Polymarket intra-market arbitrage, that typically means buying a complementary set of outcome shares (for a binary market: YES and NO; for a multi-outcome market: a complete set) such that the combined cost is less than $1.00. If the contract resolves normally, the set can be redeemed for $1.00, so the worst-case loss equals the initial cash outlay subtracted from the guaranteed $1.00 payoff — a loss amount you can calculate before trading.
In context
On Polymarket, intra-market binary and combinatorial arbitrage is often described as risk-defined at entry because the arithmetic of complete sets fixes the terminal payoff: redeeming a winning token returns $1.00 per redeemable token under the CTF. However, several non-ideal events can make a nominally risk-defined trade lose money in practice:
- Resolution risk: Polymarket uses the UMA optimistic oracle. Disputes or delays can extend settlement timing, and in rare cases the outcome may be contested in a way that changes the expected payoff.
- Slippage and partial fills: Limit orders may only partially execute, and market (FAK) orders can incur slippage. Partial execution can leave you exposed to the market’s true risk profile rather than a complete set.
- Fees and timing: Taker fees (variable by category) reduce the realized payoff; maker fees are zero but only apply if you provide liquidity. Settlement timing and wallet or relayer issues can affect cashflow.
- Smart-contract and operational risk: Token transfers, Relayer behaviour, or unexpected contract bugs can affect final settlement.
See also
- /glossary/edge