Probability of Profit in Kite Options Positions

#1

Recently, you would have seen this in your Kite

And clicking that will give you this:

This is our new Probability of Profit (PoP) powered by Sensibull.

What is Probability of Profit?
Probability of Profit, as the name suggests is the probability that you will end up making a profit on an options trade.

How is it calculated?
It is calculated by using ONLY the Black Scholes model, using the following inputs. Stock (or futures) Price, Strike Price, days to expiry, and IV and your average traded price for the option.

Does it take into account technical factors such as strength of the trend, or supports and resistances?
No. This number does not take into account any technical or fundamental analysis. A high or low probability of profit is not a recommendation of any kind

For example, the probability of profit of an ATM put and an ATM call will be equal, but in real life, we know that only one of them is going to be right (if they are going to be right that is).

So I see the probability of profit of a put option I have bought at 40%. Does it mean I have a 40% chance of making money in it?
Mathematically, yes. But in real life there are fundamentals, technicals, events etc etc

So I see the probability of profit of a put option I have sold at 80%. Does it mean I have an 80% chance of making money in a new put option position I enter?
No, it means you have an 80% probability of profit when you sold the put option at its average price. When you enter a fresh put option, the probability will change depending on your entry price

So what is the use of this thing?
It helps you with decision making. If an option you bought has a very low PoP (<15%), then it is unwise to hold on to it. You will almost always lose the entire premium. In such cases, it is wise to exit such OTM options, or exit and enter a more ATM option. No point is bleeding slow. Small drops make an ocean, right?

Caution
Probability of profit is not something you want to use standalone. Use it as a guide aide your decisions. May the odds be with you :slight_smile:

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#2

@Sensibull
I am a bit confused. I saw this feature for the first time today.
I sold one lot of 11200 CE and it showed probability of 78%. So does that mean according to the alogo there is 78% chance that NIFTY will not go above 11200 this month? or since I sold it, its the other way around?

#3

Yes, for ex: if it is P for sell then it would be 100-P for buy.

#4

Hi, will you please share the formula to calculate it

#5