The profit graph, or risk graph, is a visual representation of the possible outcomes of an options trading strategy. Profit or loss are graphed on the vertical axis while the underlying stock price on expiration date is graphed on the horizontal axis.
The profit graph below depict the risk/reward characteristics of the simple long call strategy whereby the options trader had paid $200 for a call option with a strike price of $40. A glance at the graph quickly reveals that the strategy offers unlimited profit potential if the stock price goes up and that the maximum risk is a loss of $200 should the price of the stock takes a dive.
As profit graphs provide very good overviews of options trading strategies. A quick way to scan for option trading strategies is by using profit graphs.
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