POP (probability of profit) has been a common term used in the options trading industry for decades. It’s a method to calculate a probability of profit of an options trades based on the current implied volatility of an underlying asset.
While this method has been “sticky” for such a long time, it has never proven to be a valuable method to calculate its own name.
POP False Assumptions
The POP method makes assumptions that are clearly false:
1. It assumes that the probability of an underlying of moving up or down at every given moment is exactly the same, a 50/50 scenario. This is statistically wrong.
2. It assumes that the implied volatility of the underlying will not change or assumes a trader can accurately input its correct future change into the POP calculation. This is emphatically wrong.
3. It assumes that the risk of an options trade is acceptable within the probability zone, and that the options trader can utilize the entire POP zone. This is not realistic whatsoever.
S-POP™Method, Patent-Pending by optioncolors
S-POP™ (statistical probability of profit), a patent-pending invention by OptionColors, Inc., is the next-generation probability calculation method for options trading, making POP obsolete. Instead of relying on the current implied volatility and false assumptions that go along with it, S-POP™ is a method of probability based purely on statistics. Software that uses the POP method is outdated, which is pretty much all options platforms on the market today, except for OptionColors.
With OptionColors’ S-POP™ method a user can apply statistics to any options trade for a more realistic probability calculation. A user can create S-POP™ based on seasonality, price moves, various volatility levels and much more.
S-POP™ In Action
If you have access to typical options software, then you know that standard POP, is used to superimpose a price range over a risk profile. Price ranges such as 68% for 1 standard deviation, 95% for 2 and 98% for 3 standards deviations are very common. It’s nice to see the price ranges based on current implied volatility levels, but that is all you get with the old-fashioned POP risk-analysis method.
Our invention, S-POP™, is much more robust, flexible and provides options traders with several realistic risk-modeling models. Our clients say it should be the next standard risk modeling method for the entire industry.