Expected Value
Probability-weighted average of all trade outcomes
What is Expected Value?
Expected Value The probability-weighted average of all possible outcomes of a trade. Calculated by multiplying each outcome by its probability and summing the results. A positive expected value means the trade is statistically profitable over many repetitions. Options traders should focus on expected value rather than individual trade outcomes.
Complete Definition
The probability-weighted average of all possible outcomes of a trade. Calculated by multiplying each outcome by its probability and summing the results. A positive expected value means the trade is statistically profitable over many repetitions. Options traders should focus on expected value rather than individual trade outcomes.
Example
A trade with 70% chance of making $100 and 30% chance of losing $200 has EV = (0.70 * $100) + (0.30 * -$200) = $70 - $60 = +$10.
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