A Risk Curve, or payoff diagram as they are sometimes referred to, is a graphic representation of the profit or loss of a position in relation to price changes in the underlying security. When drawn with software, risk profiles can also take into account the effects of changes in time and volatility of the position. Risk profiles enable traders to visually assess a trade’s profitability in one glance.
The risk profile shown in Figure 12 is an example of a long call option that has been computer generated by HUBB Software, an options trading and analysis software program. The horizontal numbers at the bottom of the graph read from left to right showing the underlying securities price. The vertical numbers on the right show profit and loss in dollars. The sloping graph line indicates the theoretical profit and loss of the position at various times, including expiry, as it corresponds to the price of the underlying security.
In this risk profile example, we have purchased a call option with a strike price of $28.00 at a premium of 6.70 cents or $670 for one contract. (1 contract controls 100 shares). The max risk is equal to the call premium paid, in this case $670. The maximum reward is unlimited similar to owning the underlying stock.
You don’t need a computer program to calculate the basics of a risk profile; they can be drawn by hand for most option strategies at expiry (the solid line). However, if you want to go that next step and calculate what an options position will be worth at anytime prior to expiry (the dashed lines) or what it will be worth given a change in volatility, then you will need a software tool to calculate and draw it.
Elliott Wave Options (“we” or “us”) is not registered as an investment adviser in the United States. Elliott Wave Options relies upon the “publishers’ exclusion” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Elliott Wave Options does not offer or provide personalized advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalized advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as a solicitation by us to effect, or attempt to effect, any transaction in a security. Investments in the securities markets, and especially in options and futures, are speculative and involve substantial risk.The information that we provide or that is derived from our website should not be a substitute for advice from an investment professional. We encourage you to obtain personal advice from your professional investment advisor and to make independent investigations before acting on the information that you obtain from us or derive from our website. Only you can determine what level of risk is appropriate for you. By using our website you acknowledge you have read our full Risk Warning disclaimer located HERE.
DISCLOSURE FOR AUSTRALIAN RESIDENTS
This site and the information provided on this website is owned by Financial Systems Pty Limited ACN 105 216 340 (Trading As Elliott Wave Options) and the holder of an Australian Financial Services Licence (No: 241060) (“EWO”). In providing the information on this Website, EWO is not providing advice and does not take into account the investment objectives, financial situation and particular needs of any particular person. Investments in securities or derivatives involve risk. Before making an investment decision, an investor needs to consider, with or without the assistance of a Securities Adviser, whether the information on this Website is appropriate in light of their particular investment needs, objectives or financial circumstances. By using our website you acknowledge you have read our full Risk Warning disclaimer located HERE.