Reading an option payoff

Three settled positions on one underlying. The one that finished in the money lost money, and the one that expired worth nothing made money. This course teaches you to draw any payoff of up to four legs and state four numbers about it.

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Six things you will be able to do

10 units, 58 minutes. Every one of them ends with something you can do.

01 Separate value from profitWhat an option is worth at expiry, and why the premium never appears on that line. This is the whole trap.

02 Compute value at expiryFor all four elementary positions, worked on a price ladder before anything is drawn.

03 Find the breakevenStrike plus premium for a bought call, strike minus for a bought put. Never the strike itself.

04 Draw the profit line by handAxes, the bend at the strike, and the flat stretch, drawn rather than recognised.

05 Add legs togetherA multi leg line is the vertical sum of its legs. It bends at every strike and nowhere else.

06 State the four numbersEvery breakeven, the maximum gain, the maximum loss, and the profit at a stated settlement price.

What changes after this course

You stop reading a payoff chart as a profit chart and start stating four numbers: every breakeven, the ceiling, the floor, and the result at a given settlement price.

A profit line drawn by hand for any position of up to four legs

Every breakeven located, and never confused with the strike

Maximum gain and maximum loss stated, including when one of them does not exist