How to read a payoff diagram
A payoff diagram shows the profit or loss of an options strategy at expiration as a function of the underlying asset's price. The horizontal axis is the underlying price (S) at expiration; the vertical axis is the payout. Anything above zero is profitable; below zero is a loss.
This tool ignores premiums — it shows the intrinsic payoff shape only. To get true profit/loss, subtract the net premium paid (or add net premium received) from the combined line. The shape itself reveals the strategy's directional bias, breakeven regions, and maximum gain or loss potential.
Common options strategies
Straddle: Long call and long put at the same strike. Profits when the underlying moves sharply in either direction. Maximum loss is limited to the premium paid; maximum gain is theoretically unlimited.
Strangle: Like a straddle but with the call and put at different strikes (call higher, put lower). Cheaper to enter than a straddle, but requires a larger move to become profitable.
Bull Call Spread: Buy a lower-strike call, sell a higher-strike call. Caps both maximum gain and maximum loss. Profitable when the underlying rises moderately.
Iron Condor: Sell an out-of-the-money put spread and an out-of-the-money call spread simultaneously. Profits when the underlying stays within a defined range at expiration. Popular for range-bound markets.
Frequently Asked Questions
Why are premiums not included in this visualizer?
This tool focuses on the payoff shape — the intrinsic value of the position at expiration based purely on where the underlying price lands relative to each strike. Premiums vary by volatility, time to expiration, and market conditions, and would change the vertical position of the chart without altering its shape. To compute true P&L, shift the combined line down by the net debit paid (or up by the net credit received).
What is the difference between a call and a put?
A call option gives the holder the right to buy the underlying at the strike price (K). It gains value when the underlying price (S) rises above K — payoff = max(S − K, 0). A put option gives the holder the right to sell at the strike price, gaining value when S falls below K — payoff = max(K − S, 0). Selling (shorting) an option flips the payoff sign.
What is a long future in this context?
A long future (or forward) obligates the buyer to purchase the underlying at the agreed price (K) at expiration. The payoff is linear: S − K. There is no optionality — the position gains dollar-for-dollar as S rises and loses dollar-for-dollar as S falls. It is included here to model strategies like covered calls and protective puts, which combine a futures/stock position with options.
How do I find the breakeven price of my strategy?
On the payoff diagram, the breakeven is where the combined payout line crosses zero. For a strategy built without premiums, these crossings correspond to the strike prices. Once you factor in the net premium, shift the combined line down by the debit paid — the new zero crossings are your true breakeven prices.
Can I model a covered call with this tool?
Yes. Use the "Covered Call" preset or manually add a Long Future (representing the stock position, entry at your cost basis) and a Short Call at your target strike. The resulting payoff shows capped upside above the call strike and downside exposure below the future's entry price — offset in practice by the premium received for selling the call.
What is a binary (digital) option?
A binary option pays a fixed cash amount if the underlying finishes on the right side of the strike at expiration — nothing otherwise. A Binary Call pays if S > K; a Binary Put pays if S < K. The payout is a step function rather than a kinked line. In this visualizer, the "×" quantity field controls the payout size: a Binary Call with qty=50 pays exactly 50 if in the money. Binary options appear in structured products, barrier notes, and range accrual instruments.
What is a Range Binary?
A Range Binary (also called a digital spread or corridor) pays a fixed amount only if the underlying price finishes within a specified range at expiration. It is constructed by combining a Long Binary Call at the lower bound (K₁) and a Short Binary Call at the upper bound (K₂). The net payoff is +1 for K₁ < S < K₂ and zero outside that range. It is the digital analogue of a call spread and is widely used to express a neutral, range-bound view.
Why are path-dependent options not included?
Options like barrier, Asian, lookback, and chooser contracts have payoffs that depend on the price path taken to expiration — not just where the price ends up. A terminal payoff diagram cannot represent these instruments because the same ending price S can correspond to many different payoffs depending on how it got there. The contracts in this tool — vanilla calls/puts, forwards, and binary options — form the complete set of single-underlying, path-independent European payoffs.