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How To Read A Risk Profile

Translating the different components of a risk chart

Back On The Grid

As discussed in a previous article, there are three components we use to construct our strategies at Food for Theta:
and
When establishing a strategy, we refer to each individual component as a "leg". In order to understand how these legs work in unison, risk profiles are used to visually depict the rate of profit and loss with respect to the underlying share price. Below is a blank grid which we will use to construct the risk profile of the most common strategy used by investors –
shares.
Figure 1

The Setup

Across the top of the chart you'll see the name of the strategy – at this point we just have a blank grid. Along the left side of the chart is the Y-axis which indicates changes in
This will tell you how much the strategy will profit or lose with any given change in share price. $0 along the Y-axis (corresponding with the horizontal blue line) represents all points at which the strategy would
Along the bottom of the graph is the X-axis which indicates changes in
as well as a
scale (which will come in handy for estimating probabilities).

Price

$X represents the share price at the time the position is first established. Changes in price are represented by positive and negative dollar amounts.

Three Views Of Delta

The delta scale will vary depending on the type of strategy being used. Some will use "Deviation Delta" which shows the delta difference from the
(50Δ). Others will use "Put Delta" or "Call Delta" which show the specific delta values for the specified option type.

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