Is your trade a bet or a gamble? Lay out what can happen - the odds you give each outcome and the dollars you win or lose - and this adds up the expected value: your average result if you could run the same trade many times. Loaded below is a realistic long call on TSLA (spot $420). Change any number to make it yours.
Define the trade's outcomes
Each row is one thing that could happen. Give it a probability (your own estimate) and the dollar profit or loss for that outcome. The three probabilities should add to 100%.
Outcome
Probability
Profit / loss ($)
Totals
-%
weighted below
The verdict
Expected value per trade
-
-
Bar is centered on zero: right of center is positive EV, left is negative.
The math, row by row
Outcome
Prob × P/L
= Contribution
Expected value (the sum)
-
Plain EnglishExpected value is the average result if you could take the same trade many, many times. A positive-EV trade is a bet; a negative-EV trade is a gamble - no matter how either one feels in the moment. The catch: these probabilities are your own estimates. Feed in wishful odds and you get a wishful answer. Garbage in, garbage out.
Three things to know about expected value:
Positive EV is the whole game, not any single trade. A +$135 EV does not mean this trade makes $135. It means that if you took this same setup over and over, you would average +$135 each - even though most individual runs lose.
Your inputs decide the answer. EV is only as good as the probabilities you assign. Honest, humble odds keep you closer to a real bet; flattering odds quietly turn it into a gamble you have dressed up.
A good feeling is not positive EV. A long shot can feel thrilling and still be a gamble; a boring, high-probability trade can be the real bet. Let the math, not the mood, tell you which is which.
Taxes are not shown here. Options and the underlying stock are taxed differently, and it depends on your holding period and account type. None of this is tax advice.