Options risk graph – part 1

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What is Options Risk Graph ?

Risk graph is pictorial representation of profit or loss from an option position /strategy for various price levels of underlying security.

They are fundamental tool for analysing options positions, breakeven points etc. They are also known by alternative names of Reward Risk Graph, P&L graph etc.

Main components of Risk graph are -

X-Axis = It carries different price levels of underlying. As underlying can’t fall below ZERO price, we will have only +ive values for X-Axis

Y-Axis =  It shows the net profit or loss of the position. As position can get into losses, hence Y-Axis will have the -ive values too.

Profit zone = Zone above the X-axis

Loss zone = Zone below the X-axis

Break-even point=  The point at which the risk graph crosses the X axis.

Risk Graph – The line that connects net P&L for each price level of underlying security at expiry. It will also show the max profit, max loss and breakeven points.

How many types of Risk Graphs are there ?

There are 6 basic risk graph format. Risk graph for various options strategies can be drawn by combining theese 6 graphs.

  1. Long Stock
  2. Short Stock
  3. Long Call
  4. Short Call
  5. Long Put
  6. Short Put

In future posts, I will explain each of them with example.

Feel free to leave the comment below if you want any clarification.

Happy Trading

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