What is a risk chart?

In analyzing the profit potential for stocks, an investor can use a two -dimensional diagram called a risk graph. The investor sets stock prices in an ascending order for a basic company along the horizontal axis and potential profit values ​​or loss along the vertical axis. He then draws a straight line from the lower left corner of the risk graph to the upper right corner. The exact center on the horizontal axis represents the current price, with the corresponding gain on the vertical axis of zero. If the investor holds 100 shares, the risk graph displays a change in profit or loss for any change in stock price of $ 100 (USD) worth profit or loss.

For example, imagine that ABC shares are currently $ 50. If the stock price remains $ 50, the option trader breaks evenly, shown by zero value on the center of the vertical axis. On the other hand, if the stock price increases to $ 52.50, then the corresponding vertical axis value corresponds to the investor that he will have a profit of $ 250 for this price. IfThe price drops to $ 45, the investor can easily see that he suffers from a loss of $ 500. In a single risk chart, he can prove his largest risk exposure and the greatest profit potential.

However, time is also playing a key role in determining profits or loss. The possibilities are scattering assets that lose their value with the course of time. In order to monitor three variables on a two -dimensional risk chart for the possibility, the investor draws three curves in the graph, each of which represents a profit or loss for a different date. If the price of the shares of basic security remains under the strike price long options, the loss will remain constant at the cost of the transaction, depicted by a relatively straight horizontal line. On the contrary, when the shares rises above the strike price, the plot line oblique up, eventually exceeds the turning point and mapping exponentially increases profits.

For example, a long callR for ABC shares with $ 50 for $ 2.25 per share per 100 shares. The cost of purchasing options is $ 230. The risk chart shows that if the stock price remains on or below $ 50, then the loss of the investor remains stable to $ 230. If the stock price increases to $ 52.25, the investor will even break, displayed by a linear trend rising to zero value. Any price over $ 52.23 USD on an ascending oblique line that corresponds to the gradually increasing profit values.

Graphs for profit or loss value at the time of purchase, at a half point between the current date and the expiration, and at the expiry date will show the progressive flattening of the curves in the risk chart. This reflects the accelerating deterioration over time. In addition to the time decay, traders must be responsible for shares volatility. Unfortunately, volatility cannot be rendered on the risk chart, which also renders time. However, the investor can maintain time constant and render three lines representing changes in additional volatility,To get an idea of ​​how such changes affect its position.