DEFINITION of 'Risk Graph'
A twodimensional graphical representation that displays the profit or loss of an option at various prices. The xaxis represents the price of the underlying security and the yaxis represents the potential profit/loss. Often called a "profit/loss diagram", this graph provides an easy way to understand and visualize the effects of what may happen to an option in various situations.
INVESTOPEDIA EXPLAINS 'Risk Graph'
The example above shows the profit/loss potential for a simple long call position of ABC Corp with a February expiration date, strike price of $50.00, contract size of 100 (shares) and a cost of $2.30 per share ($230 total). Notice this graph has three different lines, which represent the profit/loss at three different dates. The dotted line is the profit/loss today, the semidotted line is the profit/loss 30 days from today and the solid line is profit/loss on the expiration date (60 days from today). As you can see, as time passes, the time value of the option decreases until it reaches zero, at which point the optionholder has a maximum loss of $230 (the cost of the option contract), which would occur if the option is not exercised. Thus, using these types of graphs, an optionholder can easily view his or her potential profit/loss at or before the expiration date.

Option
A financial derivative that represents a contract sold by one ... 
Time Value
The portion of an option's premium that is attributable to the ... 
Strike Price
The price at which a specific derivative contract can be exercised. ... 
Risk Management
The process of identification, analysis and either acceptance ... 
Call Option
An agreement that gives an investor the right (but not the obligation) ... 
Exercise
To put into effect the right specified in a contract. In options ...

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