Thread by @PowerTradeHQ

1/ The term EV gets used a lot on CT, and yet I meet people who have no clue what it means constantly. ⚡️

So I am going to take a moment out of my day to explain to you Expected Value. 🧵

2/ Expected value (EV) is the sum of the probability weighted outcomes. Here is an example, let’s say you have five pieces of paper in a velvet bag, all of them numbered 1-5. If you pull any one number, you will have a 20% chance of choosing any of them. (1/5=.2)

3/ Lets do some quick math. We have a 20 percent chance of pulling a 1, 2, 3, 4, or 5. So,

1*.2 = .2
2*.2 = .4
3*.2 = .6
4*.2 = .8
5*.2 = 1

Now, if we Sum the outcomes we get 3.

4/ In college we played a game. We charged $3.25 to play. If you pulled a 5 out of the bag we paid you $5. If you pulled a 1 we paid you $1, meaning you lost $2.25 etc.

Question, would you take that bet?

5/ Since we did the math we knew the EV was 3, but we were charging $3.25 for each pull, so in the long run we averaged +.25 profit a pull.

( .25 cents bought you 1/2 a ramen packet back then btw)

6/ Now lets apply this to Options.

Let’s say we want to buy a 45k call that expires tmrw.

Let’s also say the $BTC has a 20% chance of being worth 40k, 42k, 45k, 48k, 50k.

7/ At expiration the 40k, 42k, and 45k will be worth $0. But the 48k will be worth $3k, and the 50k strike will be worth $5k.

8/ Lets do the math.

0*.2 = 0
0*.2 = 0
0*.2 = 0
3,000*.2= 600
5,000*.2 = 1000

Sum = 1,600

9/ If the probability weighted outcome of buying the 45k Call Option is $1,600. How much are you willing to pay for it?

10/ Hopefully that helped to shed some light on EV and maybe the way you think about buying options.

If you have any questions, fire away. ⚡️