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Trade Edge, POP, and Risk:Reward

How Tradient computes expected value, probability of profit, and risk:reward — and why all three matter.

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Three of the columns on every Tradient result row come from the same place: probability of profit, risk:reward, and trade edge. Together they tell you whether a trade is worth taking. Individually, each one is misleading. This page explains what they mean, how we compute them, and how to read them together.

Probability of profit (POP)

POP is the probability the trade finishes in the green at expiration, computed under the Black-Scholes log-normal assumption. For a single-breakeven trade (cash-secured put, bull put spread, etc.), it’s the area under the distribution on the “winning” side of breakeven. For a two-breakeven trade (iron condor, short strangle, butterfly), it’s the area between the two breakevens.

The exact formula uses the standard d2 from Black-Scholes:

  • d2 = (ln(S/K) + (r − 0.5σ²)T) / (σ√T)
  • P(S_T ≥ K) = N(d2)
  • P(S_T ≤ K) = N(−d2)

where S is spot, K is the breakeven, T is time to expiration in years, σ is implied vol, and N is the standard normal CDF.

POP is a model output, not destiny
POP assumes log-normal returns and uses today’s implied vol as the only volatility input. Real markets fat-tail. Treat 80% POP as “the model thinks 80% chance,” not “you will win 80% of the time.” Over hundreds of trades the gap is small; on any single trade it can be large.

Risk:reward (R:R)

For defined-risk trades, R:R is the ratio of max profit to max loss. A bull put spread that collects $1 on a $5-wide spread risks $4 to make $1, so R:R = 0.25. An iron condor with $0.65 credit on a $5 wing risks $4.35 to make $0.65, R:R ≈ 0.15.

Income trades have intentionally bad R:R. That’s the whole point: you trade reward for probability. The math only works if your win rate stays in line with the implied POP.

  • 80% POP × 0.25 R:R: break-even win rate is 80%. You’re on the edge. Below 80% real win rate and you bleed.
  • 70% POP × 0.50 R:R: break-even win rate is 67%. More forgiving.
  • 50% POP × 1.0 R:R: break-even is 50%. Pure direction; you need an actual edge.

Trade edge (expected value)

Trade edge is a back-of-envelope EV in dollars:

  • edge = POP × max_profit − (1 − POP) × max_loss

It collapses POP and R:R into a single dollar number so you can compare trades of different shapes on the same scale. A bull put spread with edge of +$23 is, in expectation, a better use of capital than a different spread with edge of +$8 — assuming both POPs are honest.

This is intentionally crude. It treats max profit and max loss as binary outcomes, ignoring everything between. The Focus mode deep-analysis view replaces this with a Monte Carlo expectation that integrates over the full distribution; for scan-row triage, the simple formula is enough.

Worked example

A 35 DTE iron condor on SPY:

  • Credit: $0.85 → max profit $85
  • Wing width: $5 → max loss $415
  • POP: 0.72
  • Edge = 0.72 × 85 − 0.28 × 415 = 61.20 − 116.20 = −$55.00

Negative. The model thinks this trade is a money-loser even though POP looks fine. This is the canonical income-trader trap: high POP can hide negative EV when R:R is bad enough. Tradient surfaces the edge column so you don’t fall into it.

How to read the three together

  • POP high, edge positive, R:R bad: a textbook income trade. Take it; size sensibly.
  • POP high, edge negative, R:R terrible:the trap. You’ll feel like a winner most of the time and give it all back on one loser. Skip.
  • POP low, edge positive, R:R great: a long-premium / lottery trade. Small size, treat as a binary bet.
  • POP medium, edge positive, R:R 1:1+: rare and beautiful. Take more than you usually would.

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