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How To Read A Risk Profile

Translating the different components of a risk chart

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Risk Profiles are used to...

Visually depict the rate of profit and loss with respect to the underlying share price

Correct! They can also reveal interesting characteristics with respect to probability.

Defend losing trades

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Determine if a product will increase in value

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Predict a crash

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What does it mean when a risk graph intersects with $0 along the Y-axis?

You have lost all your money

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The position is breaking even

You got it! Any point of a risk graph that crosses $0 along the Y-axis is a break-even point for that strategy

There is no time left in the trade

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The share price is $0

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Share price is shown along which axis of a risk profile?

X

Correct! The X-axis of a risk profile is used to indicate changes in share price

Y

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What are the odds a 30∆ threshold will be breached during the life of a trade?

15%

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30%

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45%

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60%

Correct! There is only a 30% chance the share price will remain beyond the 30∆ threshold at the end of the time frame, but there is a 60% chance the threshold will be breached. This is known as the Probability of Touch (POT).

What are the odds the share price will end up within one standard deviation at the end of a set duration?

16%

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32%

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64%

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68%

Correct! There is only a 68% chance that share price will remain within one standard deviation at the end of a set duration. There is a 32% chance it will end up beyond a standard deviation.

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Components of a Summary Table

Summarizing strategies for quick reference

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Disclaimer: By accessing Food for Theta and its services you agree to be bound by the Terms of Use & User Agreement. The information discussed at Food for Theta is based upon the personal experience, theories, and opinions of the author (De’Shan Perry), and is intended for educational and entertainment purposes only. Neither Food for Theta nor the author, De'Shan Perry, are licensed financial or investment advisors. Nothing posted on Food for Theta is intended to be, nor should it be considered financial or investment advice or a recommendation. It is up to each individual reader to personally assess the merits and accuracy of the information provided on Food for Theta. Food for Theta has no professional affiliation with any financial service or brokerage firm. Food for Theta does not endorse any particular tradable entity, underlying, or security and does not transact trades or facilitate markets. Trading requires financial risk and may not be suitable for everyone. Please consider the information provided in Characteristics and Risks of Standardized Options before deciding to invest with options.