Reading a payoff diagram
A payoff diagram shows your profit or loss at expiration (the vertical axis) for every possible price of the underlying (the horizontal axis). Where the line crosses zero is your breakeven. The flat parts show capped profit or loss; the sloped parts show where your result moves with the stock.
The four strategies here
- Long call — you pay a premium for the right to buy at the strike. Loss is capped at the premium; profit is theoretically unlimited above breakeven (strike + premium).
- Long put — the right to sell at the strike. Loss is capped at the premium; profit grows as the stock falls below breakeven (strike − premium).
- Covered call — you own the stock and sell a call against it for income. Premium lowers your breakeven; profit is capped at the strike.
- Cash-secured put — you sell a put and set aside cash to buy the shares if assigned. Profit is capped at the premium; risk grows as the stock falls.
Expiration onlyThis chart shows the outcome at expiration. Before expiration, time value and implied volatility move the price too — that's what the greeks describe.
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