How to read a payoff diagram
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A payoff diagram is a chart of the profit or loss of an option position at expiration for every price of the underlying stock.
Key points
- The horizontal axis is the price of the stock at expiration and the vertical axis is the profit or loss of the position.
- The line crosses zero at the break-even price. Above zero the position has made money, below zero it has lost money.
- A flat part of the line is a limit, either the most the position can make or the most it can lose.
- The diagram shows the result at expiration only. Before expiration the position is worth something else.
On this page
Every option position has a shape. A payoff diagram draws it: one line that says, for each price the stock can have at expiration, what the position has made or lost. The four basic positions have four shapes, and every strategy is a sum of them. The covered call and the collar are shares with one or two of these shapes added.
What the axes of a payoff diagram show
The horizontal axis is the price of the underlying stock on the expiration date. The vertical axis is the profit or loss of the position on that date, with the premium paid or received included. The horizontal line at zero separates profit, above it, from loss, below it.
The figures on this site state the result per share and per contract. One contract covers 100 shares, so a result of $1.50 per share is $150 per contract.
How to find the break-even, the maximum gain and the maximum loss
Three things are read from the line.
| What to read | Where it is on the diagram |
|---|---|
| Break-even | The price at which the line crosses zero |
| Maximum gain | The highest level of the line. A line that keeps rising has no maximum |
| Maximum loss | The lowest level of the line. A line that keeps falling to the edge of the chart goes on beyond it |
A bend in the line sits at a strike price. On one side of the strike the option is worth nothing at expiration, and on the other side it gains or loses one dollar for every dollar of the stock.
The payoff diagram of a long call and of a long put
A bought option has a loss that is limited to the premium, shown as a flat line below zero, and a gain that grows on the side where the option is in the money.
| Stock price at expiration | Profit or loss, per share | Profit or loss, per contract |
|---|---|---|
| $40 | -$2 | -$200 |
| $50 | -$2 | -$200 |
| $52 | $0 | $0 |
| $65 | +$13 | +$1,300 |
| Stock price at expiration | Profit or loss, per share | Profit or loss, per contract |
|---|---|---|
| $35 | +$13.50 | +$1,350 |
| $48.50 | $0 | $0 |
| $50 | -$1.50 | -$150 |
| $60 | -$1.50 | -$150 |
The payoff diagram of a short put and of a short call
A written option is the same line turned upside down. The gain is limited to the premium, shown as a flat line above zero, and the loss grows on the side where the option is in the money.
| Stock price at expiration | Profit or loss, per share | Profit or loss, per contract |
|---|---|---|
| $35 | -$13.50 | -$1,350 |
| $48.50 | $0 | $0 |
| $50 | +$1.50 | +$150 |
| $52 | +$1.50 | +$150 |
| $60 | +$1.50 | +$150 |
| Stock price at expiration | Profit or loss, per share | Profit or loss, per contract |
|---|---|---|
| $45 | +$1 | +$100 |
| $52 | +$1 | +$100 |
| $55 | +$1 | +$100 |
| $56 | $0 | $0 |
| $70 | -$14 | -$1,400 |
The loss of the short put ends where the stock ends, at a price of $0. The loss of the short call has no end, because the line keeps falling as the stock rises.
Example of reading the diagram of a short put
What can go wrong when reading a payoff diagram
The diagram is a picture of one day. Before the expiration date an option has time value, so a position is worth more or less than the line says. A written put can show a loss while the stock is still above its break-even, because the put has become more expensive to buy back.
The chart has edges and the position may not. A range that ends at $35 hides what the position loses at $20. The sentence under each figure on this site states the maximum loss in full, and whether it has a cap.
The diagram assumes that the position is closed at its intrinsic value on the expiration date. It leaves out commissions and fees, dividends, and an assignment before that date.
Terms used on this page
- Payoff diagram
- A chart of the profit or loss of a position at expiration for each price of the underlying, with the price on the horizontal axis and the result on the vertical one.
- Break-even
- The price of the underlying at expiration at which a position neither makes nor loses money. For a long call it is the strike price plus the premium paid; for a short put, the strike price less the premium received.
- Premium
- The price of an option, quoted per share. One standard contract covers 100 shares, so a premium of $1.50 is $150 per contract.
- Strike price
- The price per share at which the holder of an option may buy (a call) or sell (a put) the underlying shares. It is fixed for the life of the option.
- Time value
- The part of an option's premium above its intrinsic value. It pays for the time left and for the movement expected until expiration, and it is zero at expiration.
Sources
- Understanding Profit and Loss Graphs, The Options Industry Council (read 29 September 2026).
- Long Call, The Options Industry Council (read 29 September 2026).
- Long Put, The Options Industry Council (read 29 September 2026).
- Naked Put (Uncovered Put, Short Put), The Options Industry Council (read 29 September 2026).
- Naked Call (Uncovered Call, Short Call), The Options Industry Council (read 29 September 2026).