Weather Market Trading Guide

Understanding how weather markets work and how to trade them.

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How Do Prediction Markets Work?

Prediction markets are platforms where individuals trade contracts based on the outcomes of future events, like weather forecasts. They operate on the principle of collective intelligence, where contract prices reflect the perceived probability of an event occurring.

Participants buy contracts for outcomes they believe will happen (e.g., "Yes" the temperature will exceed 80°F). Contract prices typically range from $0.01 to $0.99, fluctuating with market sentiment. If the predicted event occurs, the contract settles at $1. If not, it settles at $0. Participants can buy, sell, or hold contracts before settlement to manage risk or attempt to lock in profit.

These markets leverage crowd wisdom, often providing accurate real-time insights into collective expectations. However, prices can change rapidly with new information, so research, analysis, and risk management are crucial.

How Do I Trade on Weather Markets?

Trading on weather markets like those on Kalshi involves predicting specific weather outcomes:

  • Market Setup: Kalshi defines a market around a specific condition, like "Will the high temperature in New York City on March 20th be 60°F or Above?". This creates a binary outcome: Yes or No.
  • Buying Contracts: You buy "Yes" contracts if you predict the condition will be met, or "No" contracts if you predict it won't. The price ($0.01 - $0.99) reflects the market's perceived probability (e.g., $0.60 implies a 60% chance of "Yes").
  • Market Dynamics: Prices fluctuate as new weather data (forecasts, observations) becomes available. Positive news for the "Yes" outcome might increase its price, while negative news might decrease it (and increase the "No" price).
  • Outcome and Payout: After the specified period, the market settles based on official data (like the NWS Climatological Report - CLI). If the condition was met, "Yes" contracts pay $1 each, and "No" contracts pay $0. If not, "No" contracts pay $1, and "Yes" contracts pay $0.
  • Risk and Reward: Risk stems from unpredictable weather and market volatility. Reward comes from accurately forecasting weather and market reactions.

How Do I Use Limit Orders?

Limit orders allow you to specify the exact price at which you're willing to buy or sell contracts, rather than accepting the current market price.

Steps:

  1. Navigate to the desired market.
  2. Select "Buy" or "Sell" for either "Yes" or "No" contracts.
  3. Enter your desired price (your limit).
  4. Specify the number of contracts (quantity).
  5. Place the order. It will only execute if the market reaches your specified price or better.

Example: If "Yes" contracts are currently trading at $0.60, but you only want to buy them if the price drops to $0.50, you place a limit buy order at $0.50. Your order waits until a seller offers contracts at $0.50.

Key Benefits:

  • Control over your execution price.
  • Helps avoid overpaying in volatile markets.
  • Can be used for setting up trades based on specific price targets.

Which Websites Can I Trust for Weather Information?

Reliable weather information is key. Here are some recommended sources:

  • General Forecasts: AccuWeather, The Weather Channel, Weather Underground provide accessible and generally reliable forecasts.
  • Official Data & Severe Weather: The National Weather Service (NWS) is the primary source for official observations, forecasts, warnings, and alerts in the US. Windy.com is also highly recommended for visualizing data and model outputs.
  • Localized & Hourly Detail: AccuWeather and Apple Weather (which incorporates Dark Sky technology) often provide detailed localized and hourly predictions.
  • Market-Specific Data: For trading, direct NWS sources like Time Series data, Climatological Reports (CLI), and Daily Summary Messages (DSM) are crucial. (See the City Resources and NWS Data Guide pages).

Kalshi Market Resolution and Timing

Understanding how and when markets are officially settled is crucial.

  • Resolution Source: Kalshi typically uses the final NWS Climatological Report (CLI) for the official high temperature that determines the market outcome.
  • Time Period: Final CLIs record data for a full day, usually from 12:00 AM to 11:59 PM Local Standard Time (LST) for the specific city.
  • LST vs. DST vs. Z:
    • LST (Local Standard Time): The standard time zone for the city, ignoring daylight saving. CLIs are based on this.
    • DST (Daylight Saving Time): When clocks are adjusted forward (usually in summer). While daily life follows DST, the official 24-hour climate reporting period for CLI often remains based on LST.
    • Z (Zulu Time / UTC / GMT): Coordinated Universal Time. NWS forecasts, observations (like Time Series), and many weather models use Zulu time, which does not observe daylight saving. You'll need to convert Z time to the relevant local time (LST or DST) to understand when events occur locally. For example, Chicago (Central Time) is UTC-6 (CST/LST) or UTC-5 (CDT/DST). A reporting period of 06:00Z to 06:00Z corresponds to 12:00 AM to 12:00 AM CST (or 1:00 AM to 1:00 AM CDT).
  • Mid-day Reports: Preliminary or mid-day CLI/DSM reports are useful for tracking progress but do not resolve the market. Only the final, official report for the entire 12:00 AM - 11:59 PM LST period matters for settlement.

See also: What is a CLI?

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