5. Risk Graphs

A wise saying of uncertain origin declares: “One picture is worth ten thousand words.” And so it is with an options trade. Because the value of an option depends on several factors, it is difficult to visualize the variety of ways its price can change without some kind of chart. The chart used to track the progress of an options trade is called a risk graph.

To follow the price movement of a specific option, the two factors of primary importance are the price of the underlying stock and the time remaining until expiration. The risk graph provides the visual means to comprehend how the profit or loss in an options trade is affected by changes in stock price as well as changes in time.

Risk graphs are used liberally throughout this ...

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