Probability and Statistics

Question

A day trader buys an option on a stock that will return $200 profit if the stock goes up today and lose $600 if it goes down. The trader thinks there is a 70% chance that the stock will go up.

Question: The expected value of the option’s profit is $___

Answer 1

DO you know the formula for expected value? That is all you need to do this.

X can take on the value of +$200 and -$600.

P(X=$200) = P(you win) = .70

P(X=-600)=P(you lose) = ??

E(X) = X_win* P(you win) + X_lose*P(you lose) = ...