We will use these calculations to create a payoff diagram, which is a graph that shows how an option strategy's profit or loss (P/L) changes based onunderlying price. To draw the graph, we need to calculate P/L for different levels of underlying price. We will do this right below our...
As you can see in the graph, the option's strike price (45.00) is the key point which divides the payoff function in two parts. Below the strike, the payoff chart is constant and negative (the trade is a loss). Above the strike the line is upward sloping, as the call option's pay...
In that case, the call option payoff graph will look like this:You are free to use this image on your website, templates, etc.. Please provide us with an attribution link. As one can observe, the diagram clearly shows the profits or losses of the call option’s buyer. The horizontal ...
Let us look at the following put option purchaser’s payoff graph to better understand the concept. As one can observe, the above diagram shows the losses or profits generated by a trader who purchased a 3-month XYZ index put option at 34,000. Let us assume that David, the buyer, purch...
The graph here is an illustration of this concept.Payoff x Probability In the above graph of this concept, the vertical bars simulate the daily price changes of a stock over 10 years (with a mean of 0 and standard deviation of 1). The blue line represents the payoff value of a call o...
The below payoff diagram explains how the total profit or loss of the option (Y-axis) depends on the option’s underlying price (X-axis). Strike Price = $65 In the above graph, 65 is the point that divides the graphs into two parts. Below the payoff, there is a negative figure, wh...
Figure 19.2 shows the payoff structure at maturity of this call option. The underlying value is the price of a bushel of wheat. The exercise price of $10 means that the payoff is $0 for every price (of a bushel of wheat) below $10. For every price above $10, the payoff is the ...
Short Call Payoff Diagram The payoff diagram of a short call position is the inverse of long call diagram, as you are taking the other side of the trade. Basically, you multiply the profit or loss by -1. For detailed explanation of the logic behind individual sections of the graph, see ...
The underlying must see considerable price changes for a long strangle to be profitable. In comparison, despite the high risk, there is the little payoff with a short strangle. Now, let us look at long-strangle vs. short-strangle comparisons to distinguish between the two: ...
Bull Call Spread Payoff Diagram In thegraphbelow you can see how the profit or loss behaves under the different scenarios and how the two options are driving it. The thick blue line represents overall P/L; the green line is thelong$45 strike call; the red line is theshort$50 call. ...