A ''//pay-off diagram//'' below represents the effective pay-off of a long put position of an option at the time of the expiry date. It looks at the option from the point of view of buyer.

* The //''X-axis''// in a pay-off diagram represents a range of possible share prices.
* The //''Y-axis''// in a pay-off diagram represents the profit or loss that can be realized at the time of expiration.
* The strike price represent the upfront agreed price for the option.

<<image /static/files/MBI/Module%2013/payoffdiagram.png width:600>>

This image reflects all option types in one diagram:

<<image /static/files/MBI/Module%2013/callsandputs.png width:600>>

!Buying a call
Buying a call buys you the right to buy a stock at expiration for the exercise price. It costs you immediate money. You win than money back if the stock price at exercize is higher than the strike price. If it is lower, you lost the money you invested in the call.

!Writing a call
By writing a call you promise to your buyer you will sell the stock at expiration for the exercise price. Writing a call gets you immediate money. You cannot loose money by writing a call but if the stock price is much higher than the exercise price at expiration, it will feel like it...

!Buying a put
If you buy a put you buy the right but not the obligation to sell stock at the agreed exercise price.

!Writing a put
By writing a put you promise to buy stock at the exercise price. Writing a put gets you immediate money. But you risk loosing that money and much more (up to the full amount of the stock price) if the stock price turns out to be lower than the strike price. You can risk that you need to 

<<tiddler [[Financial Options]]>>
bag
finance_public
created
Sat, 14 Jan 2012 19:17:15 GMT
creator
dirkjan
modified
Sat, 14 Jan 2012 19:17:15 GMT
modifier
dirkjan
creator
dirkjan