Option Payoff Diagrams For Put Options and Call Options, What do they mean?
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In this video we learn about options payoff diagrams for put options and call options, we see what the payoff diagrams look like for being long a call, long a put, short a call and short a put. We learn how to understand these diagrams. Later there will be a video on options combinations and how to draw those payoff diagrams.
An options payoff diagram, profit and loss diagram, or risk graph, is a visual representation of the possible profit and loss of an option strategy at options expiration. Option traders use these diagrams to evaluate how a strategy may perform over a range of prices, thereby gaining an understanding of potential outcomes. Because of the visual nature of a diagram, traders can evaluate the potential profit and loss – and the risk and reward of the position – at a glance.
To create a profit and loss diagram, values are plotted along the X and Y axes. The horizontal axis (the x-axis) shows the underlying prices, labeled in order with lower prices on the left and higher prices towards the right. The current underlying price is usually centered along this axis. The vertical axis (the y-axis) represents the potential profit and loss values for the position. The breakeven point (that indicates no profit and no loss) is usually centered on the y-axis, with profits shown above this point (higher along the y-axis) and losses below this point (lower on the axis).
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