Options · Building an options strategy · lesson 4 of 9 · 7 min read · David Alexander
Outcome bucketing: evaluating a non-linear payoff
outcome bucketing
The evaluation method options need in place of expectancy: divide the underlying's possible landing places into buckets, find the position's payoff in each (off the payoff diagram), and weight each by its probability - producing the position's full outcome distribution and its probability-weighted result. It evaluates the non-linear payoff honestly, where two averages could not, and it makes the position's whole risk-and-reward shape, not a misleading average, the object of judgement.
This lesson is part of the advanced modules.
Modules 6 to 8 are included with a paid account. The definitional summary above is the whole of this page until then.