Probability of Profit combines your option strategy’s performance graph (which plots the price of the options as determined by standard pricing models such as Black-Scholes across the various underlying securities prices) with the market-implied price distribution graph of the option strategy. The sample performance graph depicts the Probability of Profit for a straddle strategy.
The performance graph determines the options strategy’s breakeven point, which marks either the lower end (e.g., bullish option strategy) or the higher end (e.g., bearish option strategy) when calculating the area under the distribution curve. Probability of Profit is the summed area under the curve to the right (e.g., for bullish option strategies) or to the left (e.g., for bearish option strategies) of the option strategy’s breakeven point. This is depicted in the striped area under the green line, bordered by the breakeven point.
For option strategies with multiple breakeven points, Probability of Profit sums the probability of the options price within the profitable sides of the breakeven points.
See the Investopedia article for more information about the Probability of Distribution.
This article may contain links to third party websites and information, which are provided for educational purposes only. The broker does not warrant or in any way guarantee any third-party information that is provided. All links and information therein are subject to change. Probability of Profit is a mathematical expression based on accepted industry options pricing and statistical distribution models. Probability of Profit is for informational purposes only and is not a recommendation. Probability of Profit does not consider any individual investor’s financial profile, investment objectives, or other factors that would typically be used when making recommendations. The Probability of Profit calculation does not include fees or commissions.
Options involve risk and are not suitable for all investors. For more information read the “Characteristics and Risks of Standardized Options” that you can find on the OCC website.