What is an option profit and loss chart?
An Options Profit & Loss (P/L) chart lays out at-a-glance the overview on the potential gains or losses of an option strategy at expiration. This is another excellent tool we provide for free to assist you in gaining insight into any option strategy.
How does it work?
The Option P/L chart shows two axes, namely the Y and X axis. The vertical Y-axis represents the potential profit (+) and loss (-) range whereas, the horizontal X-axis represents the different stock price at expiration. On the Y axis, anything above zero represents potential profitability while anything below zero indicates a potential loss. The X axis, however, depicts the different prices that the underlying security may be trading at between the present time and the future. It is important to note that both values assume that the option would be kept through expiration.
How can a profit and loss chart helped in keeping me informed with making options trading/investment decisions?
Determining how much money you might gain or lose is undoubtedly the most important components of choosing a strategy. That is why this chart would be very much useful as it can calculate any option strategy’s theoretical risk vs. reward at expiration (i.e. position is not closed, exercised, or assigned before expiration). Specifically, the P/L chart shows how a certain option strategy would potentially perform as the price of the underlying security changes, and then readily transform that into graphs that can then assist you in gauging the possible profits or loss. These graphs can certainly also be the go-to tool when you want a easy-to-read visualization as you keep track of your breakeven points, or see how your position is doing comparing to your target goal. It is important to note again that all P/L charts/graphs are showing potential profit and loss at expiration option; actual outcome may differ prior to expiration.
The option profit & loss chart displays the hypothetical maximum profits and losses. Actual profit and losses may exceed calculated values in the theoretical figures. Investment decisions should not be made based solely upon the profit & loss chart.