Polymarket Arbitrage

Polymarket Arbitrage Strategy

PARENT: This is a sub-strategy of paper-trader. Portfolio-level rules in ../../SKILL.md take precedence.

ROLE: Identify and trade market-neutral arbitrage opportunities on Polymarket.

Orchestrator Integration

Report to parent orchestrator:

• Log all arbs to references/arb_journal.md
• Parent reads this for unified portfolio view
• Parent enforces cross-strategy risk limits

Check parent before trading:

• Verify portfolio-level exposure limits in ../../references/master_portfolio.md
• Check correlation with PM Research positions (same markets)
• Respect parent's risk level (🟢/🟡/🟠/🔴)

Your job within the system:

1. Identify mispriced markets and arbitrage opportunities
2. Paper trade with documented reasoning
3. Track performance and update this skill with learnings
4. Strategy-level Telegram updates flow through parent orchestrator

Reference Files

• references/arb_journal.md - All arb logs
• references/strategy_evolution.md - Strategy iterations
• references/market_correlations.md - Known relationships
• ../../references/rick_preferences.md - Rick's preferences (parent level)

Arbitrage Types

Type 1: Same-Market Mispricing

When YES + NO doesn't equal 100% (minus fees).

Example:
- "Will X happen?" YES: 45¢, NO: 52¢
- Combined: 97¢ (should be ~98¢ after fees)
- If combined < 98¢: Buy both sides
- If combined > 100¢: Guaranteed loss exists

Detection: Scan markets where YES + NO != 100% ± 2%

Type 2: Correlated Market Arbitrage

Markets that should have mathematical relationships but are mispriced relative to each other.

Example:
- "Will Biden win election?" YES: 30¢
- "Will a Democrat win election?" YES: 25¢
- Illogical: Biden winning implies Democrat winning
- Arb: Buy "Democrat wins" at 25¢, it must be >= 30¢

Detection: Find logically connected markets with price inconsistencies

Type 3: Conditional Probability Arb

Markets where conditional outcomes are mispriced.

Example:
- "Will X happen in January?" YES: 20¢
- "Will X happen in Q1?" YES: 15¢
- Illogical: Q1 includes January, must be >= January price

Type 4: Time Decay Arb

Markets approaching resolution where prices haven't adjusted to near-certainty.

Example:
- Event happening in 2 hours
- Strong evidence it will happen
- YES still at 85¢ when should be 95¢+

Type 5: Cross-Platform Arb

Same or equivalent events priced differently across platforms.

Platforms to monitor:
- Polymarket (primary)
- Kalshi
- PredictIt (if accessible)
- Manifold Markets (for signals)

Paper Trading Protocol

Starting Parameters

• Initial paper balance: $10,000 USDC
• Max per arbitrage: 10% ($1,000)
• Min expected edge: 2% (after fees)
• Polymarket fee assumption: ~2% round trip

Trade Documentation

EVERY arb opportunity must be logged to references/arb_journal.md:

## Arb #[N] - [DATE]

**Type**: [1-5, which arb type]
**Markets Involved**:
- Market A: [name] - [YES/NO] @ [price]
- Market B: [name] - [YES/NO] @ [price]

**Theoretical Edge**: X.X%
**Position Size**: $XXX per leg
**Net Exposure**: $XXX or $0 (hedged)

### Setup Analysis
- [Why this is an arb]
- [Mathematical relationship]
- [Risk factors]

### Outcome
- **Resolution Date**: [date]
- **Result**: [which side won]
- **P&L**: +/-$XX
- **Actual Edge**: X.X%

### Learnings
- [What worked]
- [What was missed]
- [Adjustment needed]

Market Scanning Workflow

Hourly Scan (via headless browser)

1. Navigate to polymarket.com/markets
2. For each active market:
   a. Record YES price, NO price
   b. Calculate YES + NO spread
   c. Flag if spread < 96% or > 102%

3. Build correlation map:
   a. Group markets by topic (elections, sports, crypto, etc.)
   b. Identify logical relationships
   c. Check for price inconsistencies

4. Cross-reference with:
   a. Kalshi (kalshi.com) for same events
   b. News for time-sensitive opportunities

5. Calculate expected value for each opportunity:
   EV = (Win probability × Win amount) - (Loss probability × Loss amount) - Fees

Correlation Detection

Maintain references/market_correlations.md with known relationships:

## Correlation: [Topic]

### Markets
- Market A: [ID/Name]
- Market B: [ID/Name]

### Relationship
[Mathematical relationship: A implies B, A + B = C, etc.]

### Historical Spread
- Average: X%
- Range: X% to Y%
- When spread > Y%: Consider arb

Telegram Updates

REQUIRED: Send updates to Rick via Telegram unprompted.

Update Schedule

• Morning scan (9 AM): Active arb opportunities found
• Trade alerts: When entering/exiting positions
• Resolution alerts: When markets resolve
• Evening summary (6 PM): Daily P&L, open positions

Message Format

[CLAWDBOT POLYMARKET ARB UPDATE]

Paper Portfolio: $X,XXX (+/-X.X%)

Open Arbitrage Positions:
- [Market A vs B]: Edge X.X%, resolves [date]
- [Market C]: Time decay play, target [date]

Today's Scan Results:
- Markets scanned: XXX
- Opportunities found: X
- Average edge: X.X%

Best Current Opportunity:
[Market name]
- Type: [arb type]
- Edge: X.X%
- Confidence: [High/Medium/Low]
- Risk: [Description]

Strategy Notes:
[Observations about market efficiency]

Self-Improvement Protocol

After Every 10 Resolved Arbs

1. Calculate metrics:

   • Realized vs theoretical edge
   • Win rate by arb type
   • Average holding period
   • Slippage analysis

2. Update references/strategy_evolution.md:

   ## Iteration #[N] - [DATE]
   
   ### Performance Last 10 Arbs
   - Win Rate: XX%
   - Avg Edge Captured: X.X%
   - Theoretical Edge: X.X%
   - Slippage: X.X%
   
   ### By Arb Type
   | Type | Count | Win Rate | Avg Edge |
   |------|-------|----------|----------|
   | 1 | X | XX% | X.X% |
   | 2 | X | XX% | X.X% |
   | ... | | | |
   
   ### Strategy Adjustments
   - [Changes to min edge threshold]
   - [Changes to position sizing]
   - [New correlation patterns]
   

3. Update this SKILL.md:

   • Add new arb patterns discovered
   • Update min edge thresholds
   • Document new market correlations
   • Remove strategies that don't work

Risk Management

Position Limits

• Max single market exposure: 10% of portfolio
• Max correlated exposure: 20% of portfolio
• Max illiquid market exposure: 5% of portfolio

Edge Requirements

• Type 1 (same-market): Min 1% edge
• Type 2 (correlation): Min 3% edge (harder to verify)
• Type 3 (conditional): Min 3% edge
• Type 4 (time decay): Min 5% edge (timing risk)
• Type 5 (cross-platform): Min 2% edge

Exit Rules

• Exit if edge compresses below 0.5%
• Exit if new information changes correlation logic
• Always exit before resolution if uncertain

Market Efficiency Observations

UPDATE THIS SECTION AS YOU LEARN:

Most Efficient (Hard to Arb)

• [e.g., "Major elections within 1 week of resolution"]

Least Efficient (Best Opportunities)

• [e.g., "Niche sports markets with low volume"]
• [e.g., "Newly created markets in first 24h"]

Timing Patterns

• [e.g., "Mispricings common during low-volume hours (2-6 AM EST)"]

References

• references/arb_journal.md - All trade logs (CREATE IF MISSING)
• references/strategy_evolution.md - Strategy iterations (CREATE IF MISSING)
• references/market_correlations.md - Known relationships (CREATE IF MISSING)
• references/fee_analysis.md - Platform fee tracking (CREATE IF MISSING)

Integration with Rick's Feedback

After every conversation with Rick:

1. Note any preferences or suggestions
2. Update relevant reference files
3. Adjust risk parameters if indicated
4. Acknowledge feedback in next Telegram update

Rick's Known Preferences:

• [UPDATE based on conversations]
• [Risk tolerance notes]
• [Preferred arb types]
• [Markets to focus on or avoid]