Probability of Profit (POP) tells you the likelihood that an options trade will make money at expiration. It is one of the most useful metrics for evaluating and comparing options strategies. Understanding POP helps you select trades that match your risk tolerance and trading style.
What is Probability of Profit?
POP represents the statistical likelihood that a trade will be profitable at expiration, based on the option pricing model. It is derived from option delta and accounts for your entry price.
Key Insight: A 70% POP means that, based on current implied volatility and prices, there is approximately a 70% chance the trade makes money at expiration. However, this does not account for how much you might win or lose.
POP vs Delta
Delta is often used as a proxy for probability of expiring in the money (ITM). POP is related but different:
- Delta: Probability of expiring ITM (ignoring premium paid/received)
- POP: Probability of actual profit (accounts for premium)
Example: A call option with 0.40 delta has approximately 40% chance of expiring ITM. But if you paid $2.00 for it, the stock must go even higher for you to profit, so actual POP is less than 40%.
Calculating POP for Different Strategies
Long Call or Put
POP equals the probability of the stock moving beyond your breakeven point.
Breakeven: Strike price + Premium paid (for calls)
Example: Buy $100 call for $3.00. Breakeven = $103. POP = probability stock exceeds $103.
Generally 30-45% for ATM options.
Short Put (Cash-Secured)
POP equals the probability the stock stays above your breakeven.
Breakeven: Strike price - Premium received
Example: Sell $95 put for $2.00. Breakeven = $93. POP = probability stock stays above $93.
Typically 60-75% for OTM puts.
Credit Spreads
POP equals probability the spread expires worthless (or stock stays outside the short strike).
Bull Put Spread: POP = probability stock stays above short put strike minus credit.
Example: Sell 95/90 put spread for $1.50 credit. POP = probability stock stays above $93.50.
Usually 55-70% depending on width and strikes.
Iron Condors
POP equals probability the stock stays between both breakeven points.
Example: Sell 90/85 put spread and 110/115 call spread for $3.00 total credit.
Breakevens: $87 and $113. POP = probability stock stays between $87-$113.
Typically 50-65% for well-constructed iron condors.
POP Calculation Example: Credit Spread
Let us walk through a detailed calculation for a bull put spread.
Setup:
- Stock price: $100
- Sell $95 put, delta = -0.25
- Buy $90 put, delta = -0.12
- Credit received: $1.80
Step 1: Find Breakeven
- Breakeven = Short strike - Credit = $95 - $1.80 = $93.20
Step 2: Estimate POP
- The delta at $93.20 would be approximately -0.18
- Probability of being below $93.20 = 18%
- POP = 100% - 18% = 82%
This trade has approximately 82% probability of profit.
The POP vs Expected Value Tradeoff
High POP does not always mean good trades. There is a fundamental tradeoff:
High POP trades: Win often but win small, lose infrequently but lose big.
Low POP trades: Win rarely but win big, lose often but lose small.
Example Comparison:
| Metric | High POP Trade | Low POP Trade |
|---|---|---|
| POP | 80% | 30% |
| Max Profit | $100 | $400 |
| Max Loss | $400 | $100 |
| Expected Value | (0.8 x $100) - (0.2 x $400) = $0 | (0.3 x $400) - (0.7 x $100) = $50 |
The low POP trade actually has better expected value despite winning less often!
Optimal POP Ranges by Strategy
Different strategies work best at different POP levels:
- Credit spreads: 60-75% POP - balances win rate with reasonable risk/reward
- Iron condors: 55-70% POP - needs room for the stock to move
- Cash-secured puts: 65-80% POP - higher probability for income strategies
- Long options: 30-45% POP typical - lower probability but higher payoff potential
- Strangles/straddles: 40-55% POP - betting on big moves
Probability of Touch vs Probability of Expiring ITM
An important distinction that affects option management:
- Probability of Touch: Chance the stock will reach a price at any time before expiration
- Probability of Expiring ITM: Chance the stock is past the strike at expiration
Rule of thumb: Probability of Touch is approximately 2x the Probability of Expiring ITM.
Implication: A trade with 20% chance of expiring ITM has about 40% chance of touching that strike at some point. This matters for managing positions and setting alerts.
Using POP for Trade Selection
Here is a framework for using POP in your trading:
- Define your style: Do you prefer many small wins or fewer big wins?
- Set POP targets: Choose strategies that match your preferred POP range
- Calculate expected value: Ensure POP combined with payoff creates positive EV
- Compare alternatives: Use POP to choose between similar setups
- Monitor over time: Track actual win rates vs theoretical POP
Track Your Win Rate vs POP
Pro Trader Dashboard tracks your actual win rates over time so you can compare real results to theoretical probability of profit.
Limitations of POP
POP is useful but has limitations:
- Based on implied volatility: If IV is wrong, POP is wrong
- Assumes holding to expiration: Most trades are closed early
- Does not measure magnitude: Says nothing about how much you win or lose
- Ignores assignment risk: Does not account for early assignment on short options
- Static calculation: Changes as stock price and time change
Combining POP with Other Metrics
For complete trade analysis, combine POP with:
- Expected value: The mathematical expectation of the trade
- Risk/reward ratio: Max profit divided by max loss
- Greeks: Delta, theta, vega exposure
- Days to expiration: Time for the thesis to play out
- Implied volatility rank: Is IV high or low historically?
Summary
Probability of Profit is a valuable metric for evaluating options trades, showing the likelihood of making money at expiration. However, POP alone is not enough - you must also consider expected value, which accounts for both probability and magnitude of wins and losses. Use POP to select trades that match your style, but always verify that the expected value is positive. High POP does not always mean a good trade, and low POP does not always mean a bad one.
Learn more about expected value in trading or options Greeks.