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root strategies
How To Read A Risk Profile
Translating the different components of a risk chart
Risk Profiles For Options
Long shares have fairly straight-forward risk profiles. Option profiles have a bit more to them. Take a look at this profile below... First, notice that the price of the option corresponds to the Y-Axis (1 put is worth 100 shares: 100 shares × $1.50 = $150).
Next, let's take a look at the dotted black line curving along the black risk line:
As you know, options have an date. The solid black line actually represents P/L at expiration. The black dotted line represents current P/L. At trade entry, P/L is right at $0. This line can expand and contract during the life of the trade, however it will eventually expand into the solid black line by expiration.
In the image below, take note of the negative P/L. The share price is still within the green zone, but the dotted black line is currently below the break-even line (blue horizontal)... the position has lost money. The difference between the solid and dotted black lines (shown in red) is none other than
Only at expiration will extrinsic value be completely depleted, and the position at full profit:
We'll go into greater depth about long shares and short puts in later articles. What you've learned here are the basics to decoding the symbols and lines in a risk profile. Let's recap and move on...