Stan Freifeld

A Graph is Worth a Thousand Words

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I suppose everybody has heard the saying that "a picture is worth a thousand words." Well, change "picture" to "options P&L graph" and the saying applies to options trading, too!

People are trained to look at data in a wide variety of ways. Some feel comfortable looking at a column of numbers, others like charts, and still others like to look at different types of graphs.

Our plan is to look at graphical representations of the six building blocks of options trading, and then we'll learn how to combine these graphs into some common and uncommon options positions. These graphs will allow us to glean a lot of information about our positions, just by looking.

So what are these six building blocks you may ask? We've seen them all before:

• Long stock
• Short stock
• Long calls
• Short calls
• Long puts
• Short puts

Remember, all our positions are just combinations of these six building blocks.

I refer to the following graphs as "expiration graphs." Other writers may refer to them as profit-and-loss graphs or risk profiles, but they all show the same information. The graphs are constructed by setting up a horizontal and a vertical axis. The horizontal axis shows the stock price, while the vertical axis shows a breakeven at 0, with profits above and losses below.