Prepared by

Dr Fahmi Abdul Rahim

UiTM Cawangan Melaka
INTRODUCTION TO PAYOFF DIAGRAM
 PROFIT AND LOSS AREA
PROFIT

PROFIT AREA
0 MP

LOSS AREA
LOSS
 • When investor buy stock, the current market price will
become the selling price for the investor to sell back the stock
Buy stock @ RM4
• Formula profit = Selling price-Buying Price

Point Current Buying Price Current Market Profit

Market Price Price =Selling
Price
A RM2 RM4 RM2 2-4=-2
B RM4 RM4 RM4 4-4=0
C RM6 RM4 RM6 6-4=2
Payoff diagram Long Stock @buy stock at price RM4
PROFIT

RM2
C

RM2
B
0 MP
RM4 RM6

-RM2
A

LOSS
 PROFIT
Payoff line = POL

XP BEP
0 MP

BEP=Payoff line intersect with

MP line (MP=POL)
MAXIMUM LOSS

Payoff line change the direction

LOSS

Payoff line parallel with market price line

 PROFIT
Payoff line parallel with market price line

Payoff line change the direction

MAXIMUM PROFIT
BEP=Payoff line intersect with
MP line (MP=POL)

0 MP
XP BEP

LOSS Payoff line = POL

BASIC OPTIONS STRATEGIES
 • Option trading strategy by using
WHAT IS only 1 options contract.
BASIC
OPTIONS • 4 types of strategy:
STRATEGY 1. Long Call = Buy call option
2. Short Call = Sell call option
3. Long Put = Buy put option
4. Short Put = Sell put option
Symbol Definition
MP Market price of share
XP Exercise / Strike price of option
contract
PRM Premium / Price of option contract
+VE Positive sign
-VE Negative sign
PAYOFF DIAGRAM OF BASIC OPTIONS
STRATEGIES
 Steps for payoff diagram

1. Choose option contract

2. Calculate max profit, max loss and

BEP

3. Draw and label the diagram

 Prepare payoff diagram for long call strategy

Option Premium Exercise

Price
Put 68 1618
LONG CALL

Call 83 1668
 Step 1: Choose option contract
PRM XP
long call 83 1668

Step 2: Calculate maximum loss, maximum profit and BEP

MAX LOSS = - PRM

LONG CALL = - 83

MAX PROFIT = UNLIMITED

= UNLIMITED

BEP = XP + PRM
= 1668 + 83
= 1751
 Step 3: Draw and label payoff diagram

LONG CALL 1668

1751

-83

LONG CALL
 Prepare payoff diagram for short call strategy
SHORT
CALL
Exercise
Option Premium Price
Put 68 1618

Call 83 1668
 Step 1: Choose option contract
SHORT PRM XP
CALL SHORT CALL 83 1668

Step 2: Calculate maximum loss, maximum profit and BEP

MAX LOSS = UNLIMITED
= UNLIMITED

MAX PROFIT = + PRM

= + 83

BEP = XP + PRM
= 1668 + 83
= 1751
SHORT
CALL Step 3: Draw and label payoff diagram

83

1751

1668

SHORT CALL
 Prepare payoff diagram for long put strategy

EXERCISE
OPTION PREMIUM PRICE

LONG Put 68 1618

PUT
Call 83 1668
 Step 1: Choose option contract
PRM XP
LONG PUT 68 1618

Step 2: Calculate maximum loss, maximum profit and BEP

LONG MAX LOSS = - PRM

PUT = - 68

MAX PROFIT = UNLIMITED

= UNLIMITED

BEP = XP - PRM
= 1618 - 68
= 1550
 Step 3: Draw and label payoff diagram

LONG 1618
PUT
1550

-68

LONG PUT
 Prepare payoff diagram for short put strategy

EXERCISE
OPTION PREMIUM PRICE

Put 68 1618
SHORT
PUT
Call 83 1668
 Step 1: Choose option contract
PRM XP
SHORT PUT 68 1618

Step 2: Calculate maximum loss, maximum profit and BEP

MAX LOSS = UNLIMITED
= UNLIMITED
SHORT
MAX PROFIT = + PRM
PUT = + 68

BEP = XP - PRM
= 1618 - 68
= 1550
 Step 3: Draw and label payoff diagram

68

SHORT
PUT
1550 1618

SHORT PUT
Prepared by
Dr Fahmi Abdul Rahim