Options Made Easy: Your Guide to Profitable Trading, Second Edition

Risk Profile Charts

Do you know what buying an asset such as a stock or a future looks like? To find out, we need to learn how to draw a Risk Profile Chart. This is the cornerstone on which we build far more complex strategies, so it’s important to understand this right now.

Example 1.1.

Consider a stock XYZ Inc. You buy the stock for $25. The X-axis is the stock price, with the price rising as the line moves right. The Y-axis is your profit for the trade. The 45° diagonal line is your risk profile for the trade. As the price of the stock (or underlying asset) rises, so does your profit in this example. So when the asset price rises to $50, you make $25 of profit: Current price − Buy price = Profit (loss) $50 − $25 = +$25 $10 − $25 = ($15) Chart 1.1. Buying ...