probability
Probability of Profit
Quick estimation of how likely a trade is profitable at expiration. Based on Delta for single legs, or the net premium and strikes for spreads.
Formula
POP_credit = 1 - Δ_short_strike POP_debit = Δ_long_strike
Variables
- POP
- Probability that the trade is profitable at expiration
- Δ
- Delta of the relevant strike
Worked Example
Inputs
- Strategy
- Short 30Δ put
- Δ_short
- 0.30
Calculation Steps
- 1
POP = 1 - |Δ_short_strike| - 2
POP = 1 - 0.30
Result: POP ≈ 70% — the trade profits ~70% of the time
Intuition
High POP ≠ good trade. A 90% POP trade (selling 10Δ options) wins often but loses big. What matters is POP × avg_win vs (1-POP) × avg_loss. Always consider the risk/reward ratio alongside POP.