Skip to content
GetProfitable
Search
Dictionary

Probability of profit

The modelled chance a position is profitable at expiration, accounting for the premium paid or received rather than just the strike.

Because a credit seller can be wrong about direction and still win, probability of profit is usually higher than probability-itm for short-premium trades and lower for long ones. It is measured at the breakeven-price, not the strike.

It is also the number most easily misused. A high probability of profit tells you nothing about the size of the loss when the trade fails, and the two are inversely related by construction — the market will happily sell you a 90% win rate in exchange for a 9-to-1 loss ratio.

Example: sell the XYZ 45-day $45 put for $0.90. Probability of finishing below $45 is 22%, but break-even is $44.10, so probability of profit is closer to 83%. The remaining 17% of outcomes contain losses up to $4,410.

Related: probability-itm, breakeven-price, expectancy, max-loss

Educational only, not advice. Spotted an error? Post in Site Feedback.