“Pay off diagrams” a good way to understand the profits and losses with a strategy

A convenient way to envision what happens with option strategies as the value of the underlying asset changes is with the use of a profit and loss diagram, known as a “payoff diagram”. A Payoff diagram is a graphical representation of the potential outcomes of a strategy. Results may be depicted at any point in time, although the graph usually depicts the results at expiration of the options involved in the strategy.

       The vertical axis of the diagram reflects profits or losses on option expiration day resulting from particular strategy, while the horizontal axis reflects the underlying asset price on option expiration day. At expiration, there is no time value left, so the option will sell for its intrinsic value. By convention, the diagrams ignore the effect of commissions you have to pay.

“Profit or loss in Baht are graphed on the vertical axis
Various underlying asset prices are graphed on the horizontal axis”

Example
Long Call Options

 

        According to the Payoff diagram of Long Call Options strategy, it can be seen that if the underlying asset price is lower then the strike price, the call options holders lose money which is the equivalent of the premium value, but if the underlying asset price is more than the strike price and continually increasing, the holders’ loss is decreasing until the underlying asset price reach the breakeven point, and since then the call options holders profit from their long call positions

More payoff examples of 4 main strategies of options investment