Stock Market · Options Theory

Option payoff diagrams

A payoff diagram plots an option strategy's profit and loss against the underlying price at expiry. Every options strategy has a unique payoff shape. Learning to read these diagrams is essential.

Long call payoff

• Below strike: lose the premium (flat loss line)
• At strike: lose the premium (break-even = strike + premium paid)
• Above break-even: linear profit, increasing with price
• Shape: hockey stick pointing up-right

Long put payoff

• Above strike: lose the premium (flat loss line)
• At strike: lose the premium
• Below break-even (strike − premium): increasing profit
• Shape: hockey stick pointing down-left

> Break-even for long call = strike price + premium paid. For long put = strike price − premium paid.

Short call payoff (selling a call)

• Mirror image of long call
• Profit = premium collected (flat line above strike)
• Loss = unlimited as price rises above strike + premium

Short put payoff (selling a put)

• Profit = premium collected (flat line below strike)
• Loss = increasing as price falls below strike − premium

Max profit for buyerunlimited (call) or strike − premium (put)

Max loss for buyerpremium paid

Max profit for sellerpremium collected

Max loss for sellerunlimited (call seller) or large (put seller)

Why this matters

When you combine multiple options (spreads, straddles), the payoff diagrams add up. Understanding basic shapes helps you visualise complex strategies without calculation. Most traders draw payoff diagrams before every new strategy.

Takeaway. Long call: limited loss (premium), unlimited profit above break-even. Long put: limited loss, profit below break-even. Short positions collect premium but take on the risk buyers avoided.