What Is a Risk Graph?

A risk graph, also known as a profit graph, is a two-dimensional graphical representation that displays the range of profit or loss possibilities for an options trade.

Understanding a Risk Graph

The horizontal axis of a risk graph represents the price of the underlying security at 澳洲幸运5官方开奖结果体彩网:expiration and the vertical axis represents the potential profit/loss. Often called a profit/loss diagram or p&l graph, this graph provides an easy way to understand andꦺ visualize the effects of what may happen to an option under various situations.

Risk graphs can be drawn to 澳洲幸运5官方开奖结果体彩网:show the potential payoffs for single options as well as for spreads or combination strategies. Risk graphs can also be constructed for 澳洲幸运5官方开奖结果体彩网:short positions, or for complex strategies such as 澳洲幸运5官方开奖结果体彩网:butterflies, straddles, condors, or vertical spreads.

Risk Graph Examples

The risk graph below shows the profit or loss potential for a simple long call position of ABC Corp with 60 days until the expiration date, a strike price of $50.00, a contract size of 100 (shares), and a cost (premium) of $2.30ಌ per share (for an initial outlay of $230 total).

Notice that the graph includes three different curves, each of which represent the profit/loss possibilities at three different points in time. The dotted line is the profit/loss today, the semi-dotted line is the prꦕofit/loss 30 days from today, and the solid line is the profit/loss on the expiration date (60 days from today).

As you can see, as time passes, the 澳洲幸运5官方开奖结果体彩网:time value of the option decreases until it reaches zero, at which point the option-holder has a maximum loss of $230 (the cost of the option contract), which would occur if the option is not 澳洲幸运5官方开奖结果体彩网:exercised. Thus, using these types of graphs, an option-ho♊lder can easily view their potential profit/loss at or before the expiration date.

Also notice the green vertical line at 𓄧$50.00, representing the strike price of the option, which forms an inflection point in the curve. If the option expires when the underlying ABC stock is less than $50, the option will expire worthless an🦋d the investor will lose the premium paid ($230 in all). If the stock finishes between $50 and $52.30, the trader will lose some of the premium paid. Above $52.30, the investor has unlimited profit potential.

The risk graph below shows the potential payoffs for a 50 - 55 long 澳洲幸运5官方开奖结果体彩网:call spread (also known as a bull vertical spread🔴) in KC futures, where b꧋oth the potential profit and loss from the strategy are capped.