Payoff Logic

What this unit covers

Learn to read a payoff diagram for a single call or put, the profit or loss at expiry across a range of prices, as the base for every strategy that follows.

By the end you will be able to

• Read a payoff diagram to find profit or loss at a given price.
• Calculate profit or loss as payoff minus premium paid.
• Locate break-even and identify maximum loss and maximum gain.

How it starts: The Trade You Only Half Imagined

1. You buy a call option for 40 rupees, expecting the stock to rise.
2. Someone asks where exactly you would start losing money on this trade.
3. You realise you have only ever pictured the price going up.

Words you will meet

Payoff

What an option is worth at expiry, before subtracting what you paid for it.

Premium

The price you pay upfront to buy an option.

Break-even

The underlying price at which profit or loss is exactly zero.

Strike price

The fixed price written into the option contract.

Underlying price

The market price of the stock or index the option is based on.

Expiry

The date on which an option contract ends and is settled.

In this module: Practical Option Strategies

1. Payoff Logic (this unit)
2. Spreads
3. Straddles and Strangles
4. Defined-Risk Structures and Strategy Limitations