1. What Is Expected Value In Option Trading?

Expected Value (EV) is a statistical concept used in option trading to determine the average outcome of a trade when repeated multiple times. It helps traders assess whether a trade has positive or negative expectancy over the long run.

2. How Does The Calculator Work?

The calculator uses the Expected Value formula:

Where:

• \( Win\ Probability \) — Probability of the trade being profitable (0 to 1)
• \( Profit \) — Potential profit amount in currency
• \( Loss\ Probability \) — Probability of the trade losing money (0 to 1)
• \( Loss \) — Potential loss amount in currency

Explanation: The equation calculates the average expected return per trade, helping traders identify strategies with positive expectancy.

3. Importance Of Expected Value Calculation

Details: Calculating expected value is crucial for option traders to evaluate trade strategies, manage risk, and build sustainable trading systems with positive long-term expectancy.

4. Using The Calculator

Tips: Enter win probability and loss probability as decimals between 0-1. Profit and loss should be entered in your preferred currency. Ensure probabilities sum to 1 for accurate results.

5. Frequently Asked Questions (FAQ)

Q1: What constitutes a good expected value?
A: A positive EV indicates a profitable strategy long-term. The higher the positive EV, the better the trading edge.

Q2: How do I estimate win probability?
A: Win probability can be estimated from historical data, option Greeks (especially delta), or backtesting results.

Q3: Should win and loss probabilities always sum to 1?
A: Yes, for accurate EV calculation, win probability + loss probability should equal 1, as these are mutually exclusive outcomes.

Q4: Can EV be negative?
A: Yes, a negative EV indicates a losing strategy that will lose money over many repetitions.

Q5: How often should I calculate EV for my trades?
A: EV should be calculated before entering any trade and regularly reviewed as market conditions change.