Buy an ATM call, sell two OTM calls. Stock does not rise or rises too much. Leverage, limited loss of money to downside. In or Average Out? Stock rises but not too far. That turns the trade into a Butterfly. loss of money if stock rises too far, no dividends. Guaranteed Winning Trading Strategies?
Option Trading Risk Graphs by OptionTradingpedia. Short Call Option: How to Trade a Short Call? Creating a risk graph for option trades includes all the same principles we just covered. Here is the risk graph for a simple option position, a long call, to show how it differs from the risk graph we drew for the stock. To display this profile visually, you simply take the numbers from the table and plot them in the graph. This projection is based on the combined factors of not only stock price and time to expiration, but also volatility. The ability to read and understand risk graphs is a critical skill for anyone who wants to trade options. The risk graph allows you to grasp a lot of information by looking at a simple picture.
This is a picture of what the trade will look like exactly 30 days from now, halfway between today and the February expiration date. For this, the main tool option traders use is called a risk graph. This method demonstrates the isolated effect of changes in implied volatility. This solution gives you more flexibility, but the resulting graph would only be as accurate as your guess for future volatility. Learn more in The Importance Of Time Value In Options Trading. For more insight, see What Is Option Moneyness? And the difference between the cost basis on the option and that theoretical price is the possible profit or loss of money. The picture also demonstrates immediately that as the stock price moves down, your losses get larger and larger until the stock price hits zero, where would you lose all your money.
