# Options profit and loss diagrams

Underlying price plotted on the X-axis. The ratio spread is usually a three option spread strategy with 1 at the money option combined with 2 out of the money options. Here is an easier way to summarize option components when combining them to construct spreads.

An "in the money" call would be any call with a strike price LESS than the at the money call. As you can see, PL vs Price graphs are a very effective to communicate how options work together to form specific trading strategies. All call and put options have a series of strike prices.

This is a bearish position which is profitable only as the price of the underlying goes down. Here is what the PL vs price today graph would look like as compared to the PL at expiration for a the basic options:. Buying a put option: The debit spread buy price is greater than the sell price giving you a net debit when you open the position. The above graph is shows the profit or loss of buying a put options profit and loss diagrams for a range of projected underlying prices at expiration day for the call option.

The only difference of this rain check versus a real option is that there is NO value on this option and options profit and loss diagrams is probably non-transferable. Strike price is the price of the underlying that you have the "option" to buy or sell for. Let's say you want to by a TV on sale at Wal-Mart.

Underlying price plotted on the X-axis. The maximum loss would be -1, and the maximum gain would be You would make money so long as the underlying stayed the same or moved up. There may be an expiration date on the "rain check" for 1 month from the out of stock date. Profit loss Price - microsoft stock

The debit spread buy price is greater than the sell price giving you a net debit when you open the position. The above Short Straddle position is a neutral strategy profitable if the underlying price remains the same. The above graph is shows the profit or loss of buying a put option for a range of projected underlying prices at expiration day for the call option. Profit or loss of the position plotted on the Options profit and loss diagrams. Also note the non-linear nature of a new undecayed option.

For example, if you combine buying a call and buying a put together, this forms a spread known as a straddle:. It has a maximum profit as the net difference in the strikes of both calls. Buying a call option: There two main types of four option options profit and loss diagrams

The above graph is shows the profit or loss of buying a put option for a range of projected underlying prices at expiration day for the call option. The 50 call would be the "at the money" call since it is closest to options profit and loss diagrams underlying current price of They are simply 45 degree lines which intersect at the current underlying price.

You would make money so long as the underlying stayed the same or moved up. The only difference of this rain check versus a real option is that there is NO value on this option and it is probably non-transferable. Profit or loss of the position plotted on the Y-axis.

Profit loss VS Price graphs are by far the simplest and most powerful way to communicate the risk and reward assoicated with any option or option spread two or more options. Let's say you want to by options profit and loss diagrams TV on sale at Wal-Mart. This high probability of profit comes from the statistical fact that the the underlying price will most likely remain nearly the same given a time limitation.