Expected Value - n. The sum of all possible values for a random variable, each value multiplied by its probability of occurrence.

Let us first apply this to Texas Hold'em Poker. The game starts with each player being dealt TWO cards.

• We will pretend that we have the strongest starting Texas Hold'em Poker starting hand, AA.
• We will also assume that our opponent was dealt the second strangest Texas Hold'em Poker starting hand, KK.

Because these hands are the two best starting hands, players often end up betting all their chips against each other (a.k.a. All-In). When this happens the KK opponent will only have a 18.55% chance to win, at best, while the player holding AA, will win 81.06% of the time. If we bet $1000 against each other our Expected Value formula will look like:

EV = (Winning Amount x Winning %) + (Losing Amount x Losing %)
EV = ($1000 x 81.06%) + (-$1000 x 18.55%)
EV = $810.6 - $185.5
EV = $775.1

1. There is a limit to the availability of high limit games
2. Playing at higher limits equals harder competition (less positive EV situations)
3. Time consuming - you only get dealt AA once every 225 hands

Stock or Index Options allow us to create positions that are similar to having AA in a Texas Hold'em poker game but

1. Allow us to trade at a much higher limit. In fact the minimum to establish a S&P Index Option position is approximately $2000.
2. Increased limit does not decrease positive EV situations because of the size of the stock and option market. A $20,000 position will have the same risk/reward ratio as a $2000 position.
3. Not time consuming. You can trade options on your own schedule.

Expected value helps us weight our potential reward against our risk. It is the most fundamental concept for building successful stock / index option trading or Texas Hold'em poker strategies. This is why it has its own special place. However, there are other important concepts:

• Compound Interest
• Money Management
• Law of Large Numbers
• The Greeks
• and more...