Call Option Profit-Loss Diagrams - Fidelity

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Introduction to profit-loss diagrams

Diagrams aren't just horrible, boring torture devices drawn by old Econ teachers on screechy chalkboards. We've been there. For options, profit-loss diagrams are simple tools to help you understand and analyze option strategies before investing. When completed, a profit-loss diagram shows the profit potential, risk potential and breakeven point of a potential option play. They're drawn on grids, with the horizontal axis representing a range of stock prices that the underlying stock could go to and the vertical axis representing the corresponding profit or loss for the option investor on a per-share basis.

Graphing stock

Let's warm up with a basic profit-loss diagram of a normal, purchased stock, because this will get us loose before diving into options diagrams. Below (graph 1) is a diagram of long stock. The term "long" means that the stock was purchased. It shows your profit or loss on one share of stock purchased for $39 (commissions not included). The blue line is your profit or loss, beginning on the left, where you have a loss, intersecting the X axis at $39, your breakeven, and rising to the right for share prices above $39, your profit zone. Model options strategies and see profit and loss potential. Use this educational tool to help you learn about a variety of options strategies. Access Fidelity's 5-step guide to options research. Options trading entails significant risk and is not appropriate for all investors. Certain complex options strategies carry additional risk. Before trading options, please read . Supporting documentation for any claims, if applicable, will be furnished upon request.

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Your e-mail has been sent. Article copyright 2016 by MarketSnacks. Reprinted with permission from MarketSnacks. The statements and opinions expressed in this article are those of the author. Fidelity Investments cannot guarantee the accuracy or completeness of any statements or data. 777340.3.2

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