Credit spread example
A short put spread collects 0.60, risks 1.40, has 70% POP, and costs about 0.05 to enter and exit. EV is slightly negative after costs: the setup needs a better credit or better exit rules.
probability
Expected Value (EV)
The mathematical expected profit/loss of a trade considering all possible outcomes weighted by their probabilities. Positive EV = edge.
Trading EV calculator
Expected Value Trading Formula (EV): Calculator and Examples
EV answers one practical question: if this trade setup repeated over and over, would the average outcome be positive after losses and execution costs? It connects probability of profit, average win, average loss, and friction into one number.
expected value trading formulaEV tradingformula EV
How to read the number
Positive EV means the setup has a favorable average outcome under your assumptions. Negative EV means the trade needs better entry, better management, or should be skipped.
For options, compare EV with probability of profit, max loss, and real fill quality. A high POP setup can still have poor EV.
Use paper trading to compare predicted EV with actual outcomes before risking live capital.
Debit trade example
A debit trade can have lower POP but still positive EV if average winners are much larger than average losers. That is why EV is more useful than win rate alone.
Common EV mistakes
- Treating a high probability of profit as edge without checking loss size.
- Ignoring slippage, commissions, and the bid-ask spread.
- Using max profit and max loss when your real exits happen earlier.
Quick EV trading FAQ
What is EV in trading?
Expected value is the average profit or loss a setup would produce if the same conditions repeated many times. Positive EV means the probability-weighted gains exceed the probability-weighted losses after costs.
Is a high POP trade always good?
No. A trade can win often and still lose money if the average loss is much larger than the average win. EV combines both probability and payoff size.
Should costs be included?
Yes. Slippage, commissions, and poor fills reduce expected value directly. Subtract estimated costs per trade from the formula.
Practice EV decisions before going live
Build a free account, test option setups in paper trading, and review whether your realized results match the expected value you calculated.
Start free paper tradingFormula
EV = (POP × Avg Win) - ((1-POP) × Avg Loss)
Variables
- EV
- Expected value per trade ($)
- POP
- Probability of profit
- Avg Win
- Average profit when trade wins
- Avg Loss
- Average loss when trade loses
Worked Example
Inputs
- Strategy
- Short $2-wide put spread
- Credit
- $0.60
- POP
- 70%
- Max Loss
- $1.40
Calculation Steps
- 1
Avg Win ≈ $0.60 (keep full credit) - 2
Avg Loss ≈ $1.40 (max loss on spread) - 3
EV = (0.70 × $0.60) - (0.30 × $1.40) - 4
EV = $0.42 - $0.42 = $0.00
Result: EV ≈ $0.00 — breakeven trade at fair pricing (need management edge)
Intuition
A perfectly priced options market has EV = 0 for every trade. Your edge comes from management (closing winners early, rolling losers), selection (high IVR), and size (position sizing). Never enter trades with obviously negative EV.