Options 101 Course

Risk Profile Charts

Risk Profile Charts

In order to learn about options with maximum speed it's best to transform words and concepts into pictures.

Do you know what buying an asset like a stock or a future looks like?  In order to find out, we need to learn how to draw a risk profile chart.  This is the cornerstone on which we build far more complex strategies, so it's important to understand this.

Unlike a standard price chart were the x axis represents time and the y axis represents price, a risk profile chart is structured as follows:

Example - Consider buying a stock for $25.00:

  1. The X-axis represents the stock price, with the price rising as the line moves right.
  2. The Y-axis represents your profit/loss for the trade.
  3. The 45° diagonal line is your risk profile for the trade. As the price of the stock rises, so does your profit. So when the asset price rises to $50.00, you make $25.00 profit.

  4. Current Price - Buy Price = Profit (loss)
    50.00 - 25.00 = +25.00
    10.00 - 25.00 = (15.00)

Long Stock Risk Profile Chart

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