Beginner · 6 min read

Reading a payoff diagram

Max profit, max loss and breakevens at a glance, and why 'today' differs from 'at expiry'.

A payoff diagram plots profit or loss (vertical axis) against the underlying's price (horizontal axis). It is the quickest way to see what a strategy risks and what it can earn.

What to read from it

• Max profit and max loss: the highest and lowest points of the line. A line that keeps falling or rising forever means the risk or reward is unlimited.
• Breakevens: where the line crosses zero. These are the underlying prices at which the strategy neither gains nor loses at expiry.
• Shape: a straight diagonal is directional; a 'hat' (flat top) is a range-bound strategy; a 'V' benefits from a large move either way.

At expiry vs. today

The solid line shows the result if held until expiry. The dashed curve shows an estimate for today, including remaining time value and volatility. The two lines differ most for strategies with a lot of time value, and converge as expiry approaches.

Example: a long call with strike 25,000 bought at ₹100 has max loss ₹100 per unit (below 25,000 at expiry), breakeven at 25,100, and unlimited upside above that.

Caution. A payoff diagram shows possible outcomes, not probabilities. A strategy with a high 'chance of profit' can still have a large maximum loss.