Risk Graph

Filed Under » ,
Dictionary Says

Definition of 'Risk Graph'

A two-dimensional graphical representation that displays the profit or loss of an option at various prices. The x-axis represents the price of the underlying security and the y-axis 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.

Risk Graph
Investopedia Says

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 semi-dotted 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 option-holder 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 option-holder can easily view his or her potential profit/loss at or before the expiration date. 

Related Definitions

Search results for

'Risk Graph'

  • Options Risk Graphs: Visualizing Profit Potential

    http://www.investopedia.com/articles/optioninvestor/05/012605.asp
    ... For this, the main tool option traders use is called a risk graph. ... The risk graph
    allows you to grasp a lot of information by looking at a simple picture. ...

  • Short Goldman Sachs

    http://stocks.investopedia.com/stock-analysis/moneyshow/ShortGoldmanSachsGSwithLowRisk.aspx
    ... profit potential to the downside. The risk graph below displays the potential
    risk and reward of the position. chart Click to Enlarge. ...

  • Measuring And Managing Investment Risk

    http://www.investopedia.com/articles/08/risk.asp
    ... (For further reading, see Beta: Know The Risk.) Beta helps us to understand the
    concepts of passive and active risk. The graph below shows a time series of ...

  • CFA Level 1 Study Guide - Derivatives - Managing Risk with Options ...

    http://www.investopedia.com/exam-guide/cfa-level-1/derivatives/managing-risk-options-strategies-long-short-call-put-positions.asp
    ... Profitability Ratios; 7.4 Return on Investment Ratios; 7.5 Operating Efficiency
    Ratios; 7.6 Business Risk Ratios; 7.7 Financial Risk Ratios; 7.8 ...

  • Using "The Greeks" To Understand Options

    http://www.investopedia.com/articles/optioninvestor/04/121604.asp
    ... Below is a risk graph that shows the probable profit/loss of a vertical debit spread
    that combines 10 long January 60 calls with 10 short January 65 calls and ...

  • When Geographic Diversification Fails

    http://www.investopedia.com/articles/trading/10/when-geographic-diversification-fails.asp
    ... future. The graph clearly shows that geographic diversification fails,
    so what other ways can investors diversify risk? Alternate ...

  • Series 7 Study Guide - Derivatives - Graphical Interpretations for ...

    http://www.investopedia.com/exam-guide/series-7/derivatives/long-call-graph.asp
    ... 11.4 Financial Considerations; 11.5 Determining A Client's Risk Tolerance; 11.6
    Questions To Ask Your Client; ... This graph reflects the point of view of the buyer. ...

  • Gauging Major Turns With Psychology

    http://www.investopedia.com/articles/trading/07/psychology_reversal.asp
    ... readings and buy extreme bearish readings, in accordance with appropriate risk
    parameters of ... We then show you a graph with the results - our search-volume ...

  • Stock Market Risk: Wagging The Tails

    http://www.investopedia.com/articles/financial-theory/09/bell-curve-wag-tails.asp
    ... wild ride, it is important to take a step back and re-examine risk and its ... This
    particular graph has a mean value of zero and a standard deviation of 1%. This ...

  • An Introduction To Value at Risk (VAR)

    http://www.investopedia.com/articles/04/092904.asp
    ... that while the previous graphs have shown daily returns, this graph displays monthly ...
    Summary Value at Risk (VAR) calculates the maximum loss expected (or worst ...

Related Articles

Partner Links