English Bahasa Indonesia Home Define Videos Answers Quiz Download Further Reading Beginner Course About Contact. Option Trading Risk Graphs. Option Trading Risk Graphs - Introduction So, what are these exotic looking payoff graphs and how can these so called "Risk Graphs" help you make better options trading decisions?

Risk Graphs are visual tools, taking the form of a chart, presenting the behavior of an option position across a spectrum of stock prices at expiration or at a specific number of days before expiration. Below are a couple of option trading risk graphs examples: Risk Graphs not only are "signatures" for the different option trading strategies but are also dynamically constructed to enable option traders using complex combination option trading strategies to better understand the net effect to one's portfolio at various prices.

Risk Graphs are therefore an essential option trading tool which all option traders need to eventually master for long term option trading success.

Here, we will explore exactly what Risk Graphs are, how to read and how to build a Risk Graph. Risk Graphs pin points at a glance where the areas of highest gains and losses are, allowing option traders to make more educated decisions without complex calculations. Option Trading Risk Graphs - Elements Risk Graphs are simple diagrams made up of 2 axis and a line representing option price at various stock prices.

The horizontal axis or X-Axis represents stock price and the vertical axis or Y-Axis represents option profit or loss. Risk Graphs - Center Point Risk Graphs are usually centered with the current stock price in the center of the diagram. Breakeven point is the point on the Risk Graph, along the X-Axis where the Y-Axis equals to zero. Risk Graphs - X-Axis The X-Axis or Horizontal Axis represents a range of stock prices.

The interval between the prices is usually as wide as to allow the complete representation of the option price action. The actual price is only important when determining exact breakeven prices or exact points where the highest profit or loss takes place. Otherwise, it suffice to know that stock prices decreases to the left and increases to the right. As the Rish Graph moves to the right, the graph line tells you what happens to the option price as stock prices increase.

Risk Graphs - Y-Axis The Y-Axis or Vertical Axis represents the profit or loss of the option position. The higher up along the Y-Axis, the higher the profit. The lower down along the Y-Axis, the higher the loss.

One look at the shape formed by the graph line instantly tells a truck load of information to a learned option trading practitioner. Profile Risk Graphs and Detailed Risk Graphs. It is intended to give the option trader an idea of how the particular option trading strategy or position will behave before it is actually executed.

Below are 2 examples of Profile Risk Graphs. The Risk Graph on the left instantly tells you that it is a strategy with unlimited profit to up and down side and the risk graph on the right instantly tells you that it is an option trading strategy or position with limited loss but unlimited gain. Risk Graphs - Detailed Risk Graphs Detailed Risk Graphs are Risk graphs that are built using special option trading softwares, displaying exact prices and stock option payoff charts so that the option trader can study and manipulate the graphs in order to arrive at a risk graph profile that suits one's investment objective.

This is an extremely professional option trading tool which veteran option traders use to manage very large and complex option positions or to arrive at complex, customised combination option strategies. Below is an example of Detailed Risk Graphs. Option Trading Risk Graphs - Reading Profile Risk Graphs Unlike Detailed Risk Graphs, Profile Risk Graphs has no numbers at all. A Stock option payoff charts Risk Graph's purpose is to give an impression of the following: Which direction should the stock go to result in a profit 3.

If the top end of the graph line is pointing skywards, noticias finanzas forex mayo 2013 is an option trading strategy with unlimited profit potential.

If the top end of the graph line is pointing sideways, horizontally, it means that it is an option trading strategy with limited profit potential and will rise in price no further when a certain stock forex series 34 has been reached. Conversely, if the bottom end of the profile risk graph line is pointing groundwards, it is an option trading strategy with unlimited loss potential.

Option Trading Risk Graphs by yvajotefihy.web.fc2.com

If the bottom end of the profile risk graph line is pointing sideways, horizontally, it means that it is an option trading strategy with limited loss potential and will lose no more money beyond a certain stock price has been reached. Which Direction Is Profit An option trading strategy turns a profit when the profile risk graph line crosses above the X-Axis horizontal Axis.

Remember, the center of a risk graph is the prevailing stock price when the chart is built and that stock price increases to the right and decreases to the left. If the profile risk graph line crosses above the X-Axis to the right, it means that the stock price tips stock market intraday to increase in order to turn a profit.

If the profile risk graph line crosses above the X-Axis to the left, it means that the stock price needs to decrease in order to turn a profit.

In volatile option trading strategiesThe graph line actually crosses above the X-Axis both to the left and right. A good example is the Long Straddle profile risk graph above.

Which Direction Is Breakeven The Breakeven Point of an option trading strategy is presented on a profile risk graph as the point where the graph line touches the X-Axis horizontal Axis. This is the point where the option position neither gains nor losses money. In volatile and neutral strategies, there are more than one breakeven point. Where the breakeven point is in relation to the center of the profile risk graph tells you which direction the stock price must go in order for the position to breakeven.

Putting It All Together Putting it all together, the Profile Risk Graph of the Long Condor Spread below tells us that it is an option trading strategy with: Limited profit and limited loss 2. Profit occurring when the stock stays stagnant or within a tight range from the current stock price 3. Breakeven point is when the stock rises or falls significantly, beyond which the position will start to lose money Option Trading Risk Graphs - Building A Risk Graph Building a very comprehensive risk graph representing a real, combination option trading strategy requires the help of softwares in order to calculate the exact price of the option especially before expiration.

Basic Options Charts

Here's we shall teach you how to build a simple risk graph representing a long call position at expiration step by step. Step 1 - Doing The Calculations First of all, we need to establish all the calculations for the Long Call option strategy. We decide to buy 1 contract of Jan40Call. Step 5 - Joining The Points Join the points on the risk graph together and you are done!

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