How to Estimate Probability of Earning a Profit from an Options Spread Trade

Billy Williams

After I sell and buy my options as outlined in the previous article, I complete my trading plan by consulting a few additional tools to estimate my risk exposure and the probability of making a profit on that trade.

Riding the Trade

My downside will become apparent within the expiration date of the out-of-the-money (OTM) call that I sold. The call will decay and become worthless by April 21 if all goes according to my charts.

I used a simple Monte Carlo simulator to check risk and potential profitability from one of the options calculators.

I am using the calculator at for a simple analysis. While these calculators are not completely accurate, they provide simple indicators for average probabilities of a trade.


I chose today’s prices for the current stock price, then the strike price for the target. I used the VIX reading for today as the percentage volatility.

The odds seem to be in my favor for a profitable trade, with a 75% chance that the call I sold for April 21 will expire worthless.

Now for calculating the potential for profit.


The farther out the simulation runs, the less reliable the results will be. Still, it gives a perspective that the likelihood of earning a profit is higher by 5% (30%-25%).

One general note about options trading. The farther out you buy your option, the less the time decay of the option will affect you. As you might remember, time decay is the decrease in the value of the option based on getting closer to the expiration date of the option.

In this example, I used in my favor the near-term time decay of the call I sold. The time decay for the May call is not quite as fast as the April call, with about a 30-day difference, giving my call more time to move potentially into the money.

Trade Plan

Here is how my trade plan looks for this bull calendar spread trade. Please note the simplicity of my trade plan. You can use a spreadsheet for setting up your own trade plan. You do not need anything complex and you do not need an automatic trading system.

 Sector: Large-cap Index

Sector Major Trend: Bullish

Underlying Security: DJIA

Option(s) Traded: Sell: April DJIA Call @215; CBOE ID: DJX1721D215-E

Buy: May DJIA Call @215; CBOE ID: DJX1719E215-E

Strategies Applied: Bull Calendar Spread

Expected Trade Duration: Between April Call going worthless and highest profit point reached before May Call expires based on trend analysis: probably 25 days.

Max Loss Allowed: Amount of trade $1,000

Triggers for Quick Close: Not necessary as downside is limited.

Potential Upside: Unlimited based on the price of DJIA rising.

Potential Downside: Limited to cost of entering the trade at $1,000

Probability of Profit: 75% chance the call I sold expires worthless and 70% chance that the call I bought goes in-the-money (ITM) based on Monte Carlo simulation.

Once we set up our trades, we can use a variety of tools and calculators to estimate probabilities of earning a profit. Using the theoretical calculators, or Greek calculators as they are commonly known, is typically less helpful than doing basic analysis of the underlying security for the option, choosing a trend, then verifying the option’s potential profit through either our brokers’ calculators or the simple ones mentioned here.

We will use a credit spread trade as the next example because it is one of the easier spread trades. It has a relatively low cost and it carries only modest risk.

There are high-risk versions of this trade, but we will use the low-risk version because that is the focus of this guide.


Here is a list of a few tools we need.

Options calculator:

Theoretical pricing options calculators:

And my preferred simple calculator:

These online calculators will help us identify risk levels, potential profit and general probability for profit with a particular options trade.

After the example for an index (DJIA) here, I will go down the check list and repeat the same steps for another example in a future article. However, this time I will use an equity to review the process one more time.

Billy WIliams option spread strategies


Billy Williams is an author and a 25-year veteran trader. For a free strategy guide, “Fundamentals for the Aspiring Trader”, and to learn more about profitable trading, go to


share on:

Like This Article?
Now Get Mark's FREE Special Report:
3 Dividend Plays with Sky-High Returns

This newly-released report by a top-20 living economist details three investments that are your best bets for income and appreciation for the rest of the year and beyond.

Get Access to the Report, 100% FREE

share on:


Dr. Mark Skousen

Named one of the "Top 20 Living Economists," Dr. Skousen is a professional economist, investment expert, university professor, and author of more than 25 books.

Product Details

  • Forecasts & Strategies
  • Home Run Trader
  • Fast Money Alert
  • Five Star Trader
  • TNT Trader

Bryan Perry

A former Wall Street financial advisor with three decades' experience, Bryan Perry focuses his efforts on high-yield income investing and quick-hitting options plays.

Product Details

  • Cash Machine
  • Premium Income PRO (exclusively for subscribers of Cash Machine)
  • Quick Income Trader
  • Breakout Options Alert
  • Hi-Tech Trader

Jim Woods

Jim Woods has over 20 years of experience in the markets from working as a stockbroker,
financial journalist, and money manager. As well as a book author and regular contributor to
numerous investment websites, Jim is the editor of:

Product Details

  • Successful Investing
  • High Velocity Options
  • Intelligence Report
  • Bullseye Stock Trader
  • Eagle Eye Opener

Bob Carlson

Bob Carlson provides independent, objective research covering all the financial issues of retirement and retirement planning. In addition, Bob serves as Chairman of the Board of Trustees of the Fairfax County (VA) Employees’ Retirement System, which has over $2.8 billion in assets.

Product Details

  • Retirement Watch
  • Retirement Watch Spotlight Series
  • Lifetime Retirement Protection Program

Jon Johnson

Jon Johnson's philosophy in investing and trading is to take what the market gives you regardless if that is to the upside or downside. For the past 21 years, Jon has helped thousands of clients gain success in the financial markets through his newsletters and education services:

Product Details

  • Investment House Daily
  • Stock of the Week
  • Technical Traders Alert
  • Rapid Profits Stock Trader

Used by financial advisors and individual investors all over the world, is the premier provider and one-stop shop for dividend information and research.

Product Details

Popular tools include our proprietary Dividend Calendar, Dividend Calculator, Dividend Score Card, and many more.

  • Dividend Investor