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Payoff diagrams
When trading options there are many tools that you can utilise to your advantage including Payoff Diagrams.
Payoff Diagrams show the risk/reward profile of an option or combination of options. They are a great instrument to help gain an intuitive sense for options. In the examples below we show Payoff Diagrams that highlight the potential profit or loss for vanilla long/short asset positions.
We start off with the payoff diagram if you were to buy a call. (Buy a call with the expectation that the underlying asset will increase in value)
Payoff Diagram: Buying a call option
You can see that your risk is proportional to how many tokens you buy. The maximum gain from being long a call option is potentially unlimited, the maximum loss is the amount you purchase the option for (premium)
The next payoff Diagram shows the potential profit/loss if you were to sell a call (Sell a call with the expectation that the underlying asset will decrease in value)
Payoff Diagram: Selling a call option
The maximum gain for a short call position is the amount you sell the option for. The maximum loss is unlimited, as the price of a token can theoretically keep rising. Note that these payoffs are the inverse of a long token position.
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