Options Payoff Lab
Four shapes cover every single-leg option position, and a candidate who can draw two of them from memory can derive the other two. Set a strike and a premium, take either side of the contract, and watch the payoff line and the profit line move apart by exactly what was paid.
Everything here is measured at expiry. What the contract is worth before then is a different question, and it is answered in the options guide.
Payoff is not profit, and the gap between them is the premium. Both lines are drawn below, because a single line is what lets a reader leave believing the two are the same thing. This is an expiry diagram: it shows what the contract settles for on the expiry date, not what it would be marked at before then. That second curve depends on how long is left and how much the share is expected to move, and it is not drawn here.
The position
You hold the right to buy at the strike. You paid £2.00 for it, and that is the most you can lose.
The contract
What the premium is made of
The call is out of the money at today's price, so every penny of the premium is time value.
Payoff at expiry
Per share, in pounds
Read the two lines apart. The payoff line is what the contract settles for, and it never goes below zero, because nobody exercises a right at a loss. The profit line is that payoff after the £2.00 premium, which is why it crosses zero at £57.00 and not at the £55.00 strike. At expiry the payoff line is also where delta ends up: the slope is 0 on the flat side and +1 on the sloping side, with nothing in between once there is no time left.
The same thing as numbers
| Share at expiry | Payoff | Profit |
|---|---|---|
| £36.03 | £0.00 | −£2.00 |
| £45.52 | £0.00 | −£2.00 |
| £50.00today | £0.00 | −£2.00 |
| £55.00strike | £0.00 | −£2.00 |
| £57.00breakeven | +£2.00 | £0.00 |
| £64.49 | +£9.49 | +£7.49 |
| £73.97 | +£18.97 | +£16.97 |
Every profit figure is the payoff beside it less the £2.00 premium, at every price, which is the whole of the difference between the two columns and the two lines.