Profit Graph

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Profit Graph

Profit Graph

Profit Graph

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  • product-market matrix
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  • professional
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  • Professional Coin Grading Service
  • Professional Judgment
  • Profile buyer/seller
  • profile segmentation
  • profit
  • profit a prendre
  • profit after tax
  • profit and loss statement
  • profit center
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  • Profit forecast
  • Profit Graph
  • profit margin
  • profit maximization
  • profit motive
  • profit per employee
  • Profit Range
  • profit sharing
  • profit squeeze
  • Profit Table
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Profit Graph

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.

Example

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.

Strategy Search using Profit Graphs

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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Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

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What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Option Profit/Loss Graph Maker

Option Profit/Loss Graph Maker

This option Options: Calls and Puts An option is a form of derivative contract which gives the holder the right, but not the obligation, to buy or sell an asset by a certain date (expiration date) at a specified price (strike price). There are two types of options: calls and puts. US options can be exercised at any time profit/loss graph maker lets the user create option strategy graphs on Excel. Up to ten different options, as well as the underlying asset can be combined. As well as manually being able to enter information, a number of pre-loaded option strategies are included in this workbook. To use these pre-loaded buttons, macros must be enabled.

To download this free option graph maker check out the CFI Marketplace: Option Profit/Loss Graph Maker Option Profit/Loss Graph Maker This option profit/loss graph maker allows the user to combine up to ten different types of options and the underlying stock to create a profit/loss graph.

Below is a brief preview of CFI’s option profit/loss graph maker:

The above image shows a synthetic call option Synthetic Options A synthetic option is a trading position holding a number of securities that when taken together, emulate another position. , one of the pre-loaded trading positions in this workbook. To the right of the graph, any of the buttons can be selected to preview an example of the option strategy.

The solid dark blue line on the graph shows the profit Profit Profit is the value remaining after a company’s expenses have been paid. It can be found on an income statement. If the value that remains after expenses have been deducted from revenue is positive, the company is said to have a profit, and if the value is negative, then it is said to have a loss /loss of the combined positions. The dotted lines show the profit/loss of the options and underlying asset. Below is an example of an iron butterfly spread. Using this option profit/loss graph maker, you can really visualize why the iron butterfly spread has its name.

The “Reset Values” button will clear any values being shown in the graph. From there, the user can also manually input values into the table below the graph. Alternatively, an option Options: Calls and Puts An option is a form of derivative contract which gives the holder the right, but not the obligation, to buy or sell an asset by a certain date (expiration date) at a specified price (strike price). There are two types of options: calls and puts. US options can be exercised at any time strategy can be selected from the list of buttons as a starting point and the values in the table can be altered to suit the user’s needs. The greyed boxes represent variables the user can input information into:

This option profit/loss graph maker allows the user to:

  • Change the Current Stock Price Stock Price The term stock price refers to the current price that a share of stock is trading for on the market. Every publicly traded company, when its shares are
  • Combine up to Ten Different Options
  • Choose whether to Long or Short Long and Short Positions In investing, long and short positions represent directional bets by investors that a security will either go up (when long) or down (when short). In the trading of assets, an investor can take two types of positions: long and short. An investor can either buy an asset (going long), or sell it (going short). the Stock or Options
  • Choose the Quantity of Each Option or Stock Being Purchased or Sold
  • Choose the Strike Price Strike Price The strike price is the price at which the holder of the option can exercise the option to buy or sell an underlying security, depending on whether they hold a call option or put option. An option is a contract with the right to exercise the contract at a specific price, which is known as the strike price. of Each Option
  • Choose the Premium Being Charged

The trading strategies that come pre-loaded into this workbook include:

  • Synthetic Positions
    • Synthetic Long Stock
    • Synthetic Short Stock
    • Synthetic Long Call/Protective Put
    • Synthetic Short Call
    • Synthetic Long Put
    • Synthetic Short Put/Covered Call
  • Directional Strategies
    • Collar
    • Bull Call Spread
    • Bear Call Spread
    • Bull Put Spread
    • Bear Put Spread
  • Non-Directional Strategies
    • Long Straddle
    • Long Strangle
    • Long Call Butterfly
    • Short Call Butterfly
    • Long Put Butterfly
    • Short Put Butterfly
    • Iron Butterfly
    • Reverse Iron Butterfly
    • Iron Condor
    • Jade Lizard
    • Long Guts

Synthetic Positions Synthetic Options A synthetic option is a trading position holding a number of securities that when taken together, emulate another position.

Synthetic positions are portfolios that hold multiple securities that when taken together, emulate another position. These positions are usually created to alter an existing trading position. Synthetic positions can also help traders reduce transactions necessary to change a position or to identify potential mispricings in the market.

Synthetic Long Stock

A synthetic long stock is created with a long position Long and Short Positions In investing, long and short positions represent directional bets by investors that a security will either go up (when long) or down (when short). In the trading of assets, an investor can take two types of positions: long and short. An investor can either buy an asset (going long), or sell it (going short). on the call option Call Option A call option, commonly referred to as a “call,” is a form of a derivatives contract that gives the call option buyer the right, but not the obligation, to buy a stock or other financial instrument at a specific price – the strike price of the option – within a specified time frame. and a short position on the put option. This trading position can be created to emulate the corresponding asset, however, it will involve lower initial capital requirements.

Synthetic Short Stock

A synthetic short stock is created with a short position Long and Short Positions In investing, long and short positions represent directional bets by investors that a security will either go up (when long) or down (when short). In the trading of assets, an investor can take two types of positions: long and short. An investor can either buy an asset (going long), or sell it (going short). on the call option and a long position on the put option. This trading position can be created to emulate a short position on the underlying asset. The benefit, like the synthetic long stock, are lower initial capital requirements. There is also the benefit of not needing to consider dividends Stock Dividend A stock dividend, a method used by companies to distribute wealth to shareholders, is a dividend payment made in the form of shares rather than cash. Stock dividends are primarily issued in lieu of cash dividends when the company is low on liquid cash on hand. like in the actual short-selling position of the stock.

Synthetic Long Call/Protective Put

The synthetic long call is created by holding a long position Long and Short Positions In investing, long and short positions represent directional bets by investors that a security will either go up (when long) or down (when short). In the trading of assets, an investor can take two types of positions: long and short. An investor can either buy an asset (going long), or sell it (going short). on the asset and a long position on the put option. This trading position emulates a long call option. Often this position is created when a trader is already holding either the asset or the put option Put Option A put option is an option contract that gives the buyer the right, but not the obligation, to sell the underlying security at a specified price (also known as strike price) before or at a predetermined expiration date. It is one of the two main types of options, the other type being a call option. . If they are holding the asset and believe that prices may fall, they can buy the put option hence the alternative name protective put Protective Put A protective put is a risk management and options strategy that involves holding a long position in the underlying asset (e.g., stock) and purchasing a put option with a strike price equal or close to the current price of the underlying asset. A protective put strategy is also known as a synthetic call. . If a trader is holding the put option because they thought prices would fall, but expectations change, instead of selling the put they might purchase the asset, which creates the synthetic long call and lowers transaction costs Transaction Costs Transaction costs are costs incurred that don’t accrue to any participant of the transaction. They are sunk costs resulting from economic trade in a market. In economics, the theory of transaction costs is based on the assumption that people are influenced by competitive self-interest. .

Synthetic Short Call

A synthetic short call is created through a short position on the underlying asset, and a short position on the put option. This trading position emulates a short call position. Often this position is created to alter an existing one to reduce transaction costs. For example, if a trader wants to change their position from a short Long and Short Positions In investing, long and short positions represent directional bets by investors that a security will either go up (when long) or down (when short). In the trading of assets, an investor can take two types of positions: long and short. An investor can either buy an asset (going long), or sell it (going short). put to a short call, they can simply short the underlying asset Asset Class An asset class is a group of similar investment vehicles. Different classes, or types, of investment assets – such as fixed-income investments – are grouped together based on having a similar financial structure. They are typically traded in the same financial markets and subject to the same rules and regulations. rather than closing the put position and opening the call position.

Synthetic Long Put

A synthetic long put position is created by holding a short position on the underlying asset and a long position Long and Short Positions In investing, long and short positions represent directional bets by investors that a security will either go up (when long) or down (when short). In the trading of assets, an investor can take two types of positions: long and short. An investor can either buy an asset (going long), or sell it (going short). on the call option. This trading position emulates a long put position. Again, a synthetic long put is often created to alter an existing position. If a trader is holding a long call position and wants to switch to a long put, they can simply short the underlying asset. This is preferable to closing the call option and buying a put since it reduces the number of transactions, which in turn reduces costs.

Synthetic Short Put/Covered Call

A synthetic short put position is created by holding the underlying asset and shorting the call option. This trading position emulates a short put position. The synthetic short put can be created to alter an existing position. This position is also referred to as the covered call Covered Call A covered call is a risk management and an options strategy that involves holding a long position in the underlying asset (e.g., stock) and selling (writing) a call option on the underlying asset. . Investors can sell call options to generate income, and by holding the underlying asset, they are covered if the price of the underlying asset increases and the options are exercised.

Directional Trading Strategies Directional Trading Strategies Directional options strategies are trades that bet on the up or down movement of the market. For example, if an investor believes the market is rising,

Directional trading strategies are bets on whether the underlying asset will increase or decrease in value. These strategies are used when a trader believes they can predict the direction of the market or underlying asset.

Collar

A collar Collar Option Strategy A collar option strategy limits both losses and gains. The position is created with the underlying stock, a protective put, and a covered call. is created by selling a call option, holding the underlying asset, and buying a put option. it can be thought of as a simultaneous protective put Protective Put A protective put is a risk management and options strategy that involves holding a long position in the underlying asset (e.g., stock) and purchasing a put option with a strike price equal or close to the current price of the underlying asset. A protective put strategy is also known as a synthetic call. and covered call Covered Call A covered call is a risk management and an options strategy that involves holding a long position in the underlying asset (e.g., stock) and selling (writing) a call option on the underlying asset. . A collar limits both the downside loss and upside gain. Collars are often used when the underlying asset has increased significantly in price and an investor holding this asset wants to protect this unrealized gain.

Bull Call Spread

A bull Bullish and Bearish Professionals in corporate finance regularly refer to markets as being bullish and bearish based on positive or negative price movements. A bear market is typically considered to exist when there has been a price decline of 20% or more from the peak, and a bull market is considered to be a 20% recovery from a market bottom. call spread is created by holding a long position on a call option and selling a call option at a higher strike price Strike Price The strike price is the price at which the holder of the option can exercise the option to buy or sell an underlying security, depending on whether they hold a call option or put option. An option is a contract with the right to exercise the contract at a specific price, which is known as the strike price. . The investor Investor An investor is an individual that puts money into an entity such as a business for a financial return. The main goal of any investor is to minimize risk and will gain if the asset increase in price, however, the upside gain is capped by the short call option. A bull call spread is employed when an investor believes the price of the corresponding asset will increase by a limited amount. The short call option premium can be used to cover part of the cost of the long call.

Bear Call Spread

The bear Bullish and Bearish Professionals in corporate finance regularly refer to markets as being bullish and bearish based on positive or negative price movements. A bear market is typically considered to exist when there has been a price decline of 20% or more from the peak, and a bull market is considered to be a 20% recovery from a market bottom. call spread is created by shorting a call option with a lower strike price and holding a long call with a higher strike price. This strategy is also called a credit call spread since it generates a net credit when first opened. the bear call spread is generally used to generate income if the asset price is expected to decrease or stay stable.

Bull Put Spread

A bull put spread is created by buying a put option Put Option A put option is an option contract that gives the buyer the right, but not the obligation, to sell the underlying security at a specified price (also known as strike price) before or at a predetermined expiration date. It is one of the two main types of options, the other type being a call option. and selling a put option at a higher strike price. This option strategy is used when a trader believes the asset will move slightly higher in price. This strategy can be used to generate income and will result in a net debit when opening the position.

Bear Put Spread

A bear put spread is created by selling a put option, and buying a put option at a higher strike price Strike Price The strike price is the price at which the holder of the option can exercise the option to buy or sell an underlying security, depending on whether they hold a call option or put option. An option is a contract with the right to exercise the contract at a specific price, which is known as the strike price. . This strategy is used when a trader believes that the price of the asset will fall. The gains are capped as the asset decreases in price but the losses are also capped as the asset increases in price.

Non-Directional Trading Strategies Non-directional Trading Strategies Template The non-directional trading strategies template allow users to determine the profit when buying options. This template focuses on non-directional strategies

Non-directional trading strategies bet on the volatility Vega (ν) Vega is a sensitivity measure used in assessing options. It is the sensitivity of an option price to a 1% change in the volatility of the underlying asset of the underlying asset. The direction the asset value moves will generally be much less important in these trading strategies. There are however exceptions that do consider the direction of the asset price in these strategies. Non-directional strategies are used when a trader believes an asset will have either very low volatility Volatility Volatility is a measure of the rate of fluctuations in the price of a security over time. It indicates the level of risk associated with the price changes of a security. Investors and traders calculate the volatility of a security to assess past variations in the prices or high volatility but they do not know in which direction.

Straddle

A long straddle is created by buying an at-the-money call option and an at-the-money put option. The result is a net credit and the investor will gain from a large swing in price either upwards or downwards. Traders who believe there is high volatility Volatility Volatility is a measure of the rate of fluctuations in the price of a security over time. It indicates the level of risk associated with the price changes of a security. Investors and traders calculate the volatility of a security to assess past variations in the prices but do not know which direction the asset will move in may employ a straddle.

A short straddle is created by selling an at-the-money call option Call Option A call option, commonly referred to as a “call,” is a form of a derivatives contract that gives the call option buyer the right, but not the obligation, to buy a stock or other financial instrument at a specific price – the strike price of the option – within a specified time frame. and at-the-money put option Put Option A put option is an option contract that gives the buyer the right, but not the obligation, to sell the underlying security at a specified price (also known as strike price) before or at a predetermined expiration date. It is one of the two main types of options, the other type being a call option. . This results in a net debit, however the investor has unlimited upside and downside loss potential.

Strangle

A strangle is similar to a straddle. Instead of buying the call and put option at-the-money, they are both bought out-of-the-money. Since both options are out of the money, the cost of a strangle is generally less than a straddle, however it requires greater volatility to profit Profit Profit is the value remaining after a company’s expenses have been paid. It can be found on an income statement. If the value that remains after expenses have been deducted from revenue is positive, the company is said to have a profit, and if the value is negative, then it is said to have a loss from. Investors who believe there is high volatility may employ a strangle.

A short strangle is created by selling an out-of-the-money call option and out-of-the-money put option. This strategy is similar to a short straddle. It results in a net debit lower than the short straddle, however, the debit is held at a greater range for the corresponding asset price.

Call Butterfly Spread

A long call butterfly is created by buying an in-the-money call option, selling two at-the-money call options Call Option A call option, commonly referred to as a “call,” is a form of a derivatives contract that gives the call option buyer the right, but not the obligation, to buy a stock or other financial instrument at a specific price – the strike price of the option – within a specified time frame. and buying an out-of-the-money call option. This results in a net debit when opening this position. As the asset price moves in either direction, this position will fall in value, however the upside and downside losses are capped. A trader will employ a butterfly spread when they believe the underlying asset will experience very little volatility.

A short call butterfly is created by selling an in-the-money call option, buying two at-the-money call options and selling an out-of-the-money call option. This results in a net credit, however the investor will gain from upside or downside. The upside or downside gain in a short call butterfly is capped. An investor might employ this strategy if they believe the underlying asset will experience high volatility Volatility Volatility is a measure of the rate of fluctuations in the price of a security over time. It indicates the level of risk associated with the price changes of a security. Investors and traders calculate the volatility of a security to assess past variations in the prices .

Put Butterfly Spread

A long put butterfly is constructed by buying an out-of-the-money put option Put Option A put option is an option contract that gives the buyer the right, but not the obligation, to sell the underlying security at a specified price (also known as strike price) before or at a predetermined expiration date. It is one of the two main types of options, the other type being a call option. , selling two at-the-money put options and buying an in-the-money put option. This results in a net debit. The long put butterfly spread gives a payoff very similar to the long call butterfly, however it is constructed with put options rather than call options. An investor will employ this strategy when they believe the underlying asset will experience very little volatility.

A short put butterfly is created by selling an out-of-the-money put option, buying two at-the-money put options, and selling an in-the-money put option. The profit/loss graph of this strategy is very similar to a short call butterfly spread, however it is constructed with put options rather than call options.

Iron Butterfly

A long iron butterfly is created by buying an out of the money put option, selling an at-the-money put option, selling an at-the-money call option, and buying an out-of-the-money call option. This strategy can also be thought of as a combination of a bear put spread and a bull call spread.

The profit Profit Profit is the value remaining after a company’s expenses have been paid. It can be found on an income statement. If the value that remains after expenses have been deducted from revenue is positive, the company is said to have a profit, and if the value is negative, then it is said to have a loss /loss of this strategy is very similar to the long call butterfly and long put butterfly spread. The payoff will be highest between the lower and higher strike prices. A trader might employ an iron butterfly if they believe the underlying asset will experience very little volatility Volatility Volatility is a measure of the rate of fluctuations in the price of a security over time. It indicates the level of risk associated with the price changes of a security. Investors and traders calculate the volatility of a security to assess past variations in the prices .

The reverse iron butterfly or short iron butterfly spread is created by selling an out-of-the-money put option, buying an at-the-money put option, buying an at-the-money call option, and selling an out-of-the-money call option. This will result in a very similar profit/loss graph as the short put butterfly and short call butterfly spread. The investor will start with a net credit when opening this trading position, however will benefit from the corresponding asset price moving upwards or downwards.

Iron Condor

The iron condor strategy is constructed by buying an out-of-the-money put option Put Option A put option is an option contract that gives the buyer the right, but not the obligation, to sell the underlying security at a specified price (also known as strike price) before or at a predetermined expiration date. It is one of the two main types of options, the other type being a call option. , selling a slightly out-of-the-money put option with a higher strike price, selling a slightly out-of-the-money call option and buying an out-of-the-money call option with a higher strike price. The iron condor is similar to the iron butterfly, however the initial net debit is lower.

The values in which the iron condor results in a profit is generally larger than the iron butterfly. A trader may employ an iron condor if they believe that the underlying asset will experience very low volatility. An iron condor may be employed over an iron butterfly if the trader is less sure about how stable the asset price will be.

Jade Lizard

The jade lizard is constructed by selling a put option with a lower strike price Strike Price The strike price is the price at which the holder of the option can exercise the option to buy or sell an underlying security, depending on whether they hold a call option or put option. An option is a contract with the right to exercise the contract at a specific price, which is known as the strike price. , selling a call option with a higher strike price, and buying a call option with an even higher strike price. The jade lizard attempts to take advantage of the volatility skew. This means that the out-of-the-money put should trade with a higher premium to an equidistant out-of-the-money call. The jade lizard will try to collect a premium from low volatility while also eliminating upside risk Risk In finance, risk is the probability that actual results will differ from expected results. In the Capital Asset Pricing Model (CAPM), risk is defined as the volatility of returns. The concept of “risk and return” is that riskier assets should have higher expected returns to compensate investors for the higher volatility and increased risk. . This strategy is slightly bullish Bullish and Bearish Professionals in corporate finance regularly refer to markets as being bullish and bearish based on positive or negative price movements. A bear market is typically considered to exist when there has been a price decline of 20% or more from the peak, and a bull market is considered to be a 20% recovery from a market bottom. in direction since the downside risk is not eliminated.

A long guts option strategy is similar to strangle, however instead of constructing it using out-of-the-money options, it is created by buying an in-the-money call option Call Option A call option, commonly referred to as a “call,” is a form of a derivatives contract that gives the call option buyer the right, but not the obligation, to buy a stock or other financial instrument at a specific price – the strike price of the option – within a specified time frame. and buying an in-the-money put option Put Option A put option is an option contract that gives the buyer the right, but not the obligation, to sell the underlying security at a specified price (also known as strike price) before or at a predetermined expiration date. It is one of the two main types of options, the other type being a call option. . The premiums that are paid will result in a net credit. This strategy will profit from a large swing in price upwards or downwards. Similarly to the strangle, traders may employ this strategy when they believe the underlying asset will experience high volatility.

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