Expected Value
Expected value is a simplified estimate of value per share based on predicted probability, market price, and costs.
Definition
Expected value is a simplified way to translate a predicted probability and a market price into a per share value estimate. It depends strongly on cost assumptions.
Why it matters
EV helps you see whether a small probability edge is likely to be dominated by fees and execution frictions like effective spread.
Important limitations
• EV depends on how you model fees and whether you cross the spread.
• EV is not a guarantee and is not a recommendation.
• In thin markets, realized EV can diverge due to execution risk.
Common pitfalls
Treating EV as certainty: It is a model output based on assumptions.
Ignoring settlement rules: Settlement mechanics can dominate payoffs.