Options profit and loss diagrams,options for dummies,day traders stories - Review

| Category: How To Trade Futures
A profit and loss diagram, or risk graph, is a visual representation of the possible profit and loss of an option strategy at a given point in time. Option traders use profit and loss 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 X and Y axes. The horizontal axis (the x-axis) shows the underlying prices, labeled in order with lower prices on the left and rising prices towards the right. 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). When the graph line is on \$25 (the cost per share), note that the profit and loss value is \$0.00 (breakeven).
As the stock price moves higher, so does the profit; conversely, as the price moves lower, the losses increase. The figure shows the position breaks even at \$25 (our purchase price) and as the stock's price increases (moving right along the x-axis) the profits correspondingly increase. In this example, shown in Figure 10, a call option has a strike price of \$50 and a \$200 cost (for the contract).

If the option expires worthless (for example, the stock price was \$50 at expiration), the loss would be \$200, as shown by the graph line interested the y-axis at a value of negative 200. The breakeven point would be a stock price of \$52 at expiration; here, the investor has "lost" \$200 by paying the premium and the stock's rising price is equal to a \$200 gain, canceling out the premium. Figure 11, taken from the Options Industry Council's Web site, shows various options strategies and the corresponding profit and loss diagrams.

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