← AdvancedLesson 1 · 4:33
What does the shape of a payoff graph tell you?
Summary
You can read a last-day payoff graph and name the options that built it: where each corner sits, how many contracts are there, whether each was bought or sold, and whether it is a call or a put. You also know when two different builds draw the same shape.
Key terms
- last-day line
- The line on a payoff graph that shows your result on the option's last day, also called the expiry line.
- corner
- A point where a payoff line changes direction; on a last-day graph every corner sits at a strike.
- slope
- How steep the payoff line is step by step; one contract changes it by $100 for each $1 the stock moves.
- bend up / bend down
- A bend up at a corner means an option was bought there, and a bend down means one was sold.
- twin builds
- Two different sets of options that draw the same last-day shape, told apart by whether you paid or collected at the start.
Check yourself
Answer each question to see why the right answer is right.
1. On a last-day payoff graph, where does every corner sit?
2. A graph has one corner at $100. The line bends up there, and the slope jumps by two steps instead of one. What built it?
3. Which statement about bends is true?
4. You start in the flat middle of a graph and walk left. The line bends up at $95. What option is there?
5. A put bought at $100 with a put sold at $105 draws the same last-day picture as the bull call spread. How can you tell them apart?
Finished the video and the quiz? .