Payoff Diagram
A payoff diagram is the strategy reduced to one line: for every price the underlying could close at on expiry, what you make or lose. If you cannot draw it, you do not know the trade.
In short: a payoff diagram (payoff chart) is a graph with the underlying’s price at expiry on the horizontal axis and the strategy’s net profit or loss on the vertical axis. Each option leg contributes a straight-line payoff with a kink at its strike; the strategy’s line is the sum of the legs, shifted by the net premium paid or received. It shows break-even points, maximum profit, maximum loss and the price range in which the trade works. It describes expiry only; before expiry the position’s value follows a curved line that depends on time and implied volatility.
The intuition
An option’s value at expiry is a simple function of one number: where the underlying closes. A call is worth the amount by which the close exceeds the strike, or nothing; a put is worth the amount by which the strike exceeds the close, or nothing. Subtract the premium paid (or add the premium received) and you have the leg’s profit for that closing price. Do it for every closing price and you have a line. Do it for every leg and add the lines and you have the strategy. The diagram is nothing more than that arithmetic drawn out, which is why it is the first thing to check and the hardest thing to argue with.
Formulas (per unit; multiply by lot size and lots)
| Leg | Value at expiry (S = underlying close, K = strike) | Profit at expiry |
|---|---|---|
| Long call | max(S − K, 0) | max(S − K, 0) − premium paid |
| Short call | −max(S − K, 0) | premium received − max(S − K, 0) |
| Long put | max(K − S, 0) | max(K − S, 0) − premium paid |
| Short put | −max(K − S, 0) | premium received − max(K − S, 0) |
| Long futures | S − entry price | S − entry price |
Strategy payoff = Σ leg payoffs. Break-even: every S at which the strategy payoff = 0. The line is piecewise linear with a kink at each strike, so only the strikes and the points far beyond them need computing; everything between is a straight segment.
Worked example (illustrative prices)
Suppose NIFTY is at 24,000 and a trader builds a bull call spread on one lot (65 units): buy the 24,000 call at ₹300, sell the 24,400 call at ₹130. Net debit ₹170 per unit, ₹11,050 per lot.
| NIFTY at expiry | Long 24,000 call | Short 24,400 call | Net per unit | Per lot |
|---|---|---|---|---|
| 23,500 | 0 − 300 = −300 | +130 − 0 = +130 | −170 | −₹11,050 |
| 24,000 | −300 | +130 | −170 | −₹11,050 |
| 24,170 | 170 − 300 = −130 | +130 | 0 | ₹0 (break-even) |
| 24,400 | 400 − 300 = +100 | +130 | +230 | +₹14,950 |
| 25,000 | 1,000 − 300 = +700 | 130 − 600 = −470 | +230 | +₹14,950 |
Reading the line: maximum loss ₹11,050 for any close at or below 24,000; break-even 24,170 (lower strike plus net debit); maximum profit ₹14,950 for any close at or above 24,400 (strike width 400 minus debit 170, times 65). The whole trade is described by three numbers and two kinks.
Why it matters
- It exposes undefined risk. A line that keeps falling at one edge of the chart is a naked position; see naked option. A line that flattens is defined risk. The diagram makes the difference impossible to miss.
- It gives the break-evens that matter for sizing. Position size follows from maximum loss, which the diagram states exactly for defined-risk trades.
- It is the expiry line only. Before expiry the position’s value is a smooth curve above or below the kinked line, shaped by time to expiry and implied volatility. A trade can be losing today and on track for its expiry profit, or the reverse.
- It tests adjustments. Adding or rolling a leg redraws the line; comparing before and after shows what the adjustment actually bought.
Common mistakes
- Reading the expiry line as today’s P&L. The two coincide only at expiry.
- Ignoring costs. Brokerage, STT on the sold legs and the bid-ask spread shift the whole line down; on narrow spreads this can move the break-even by several points.
- Forgetting the lot. Per-unit numbers look small; multiply by 65 (NIFTY) or the relevant lot before judging the risk.
- Drawing a strategy without its futures or stock leg. A covered call without the stock looks like a naked short call.
Indian specifics
NSE index options are cash-settled at the final settlement price (the index’s closing value computed from the last 30 minutes), so the horizontal axis of an index payoff diagram is that settlement price, not the last trade. Stock options settle physically since 2019: an in-the-money leg at expiry becomes a delivery obligation, so the diagram describes the economic outcome but not the cash flow, which includes the share purchase or sale. STT on exercised in-the-money legs (0.15% of intrinsic value from 1 April 2026) is a small downward shift at the in-the-money end of the line. Lot sizes in November 2026: NIFTY 65, Bank Nifty 30, FinNifty 60, SENSEX 20.
FAQ
What is a payoff diagram in options?
A chart of expiry profit or loss against the underlying price; each leg is a kinked line and the strategy is their sum.
How do I draw a payoff diagram?
Compute profit at each strike and at the far ends, add the legs, plot and join with straight lines.
Where is the break-even on a payoff diagram?
At every price where the line crosses zero; a long call breaks even at strike plus premium.
Why does my P&L today differ from the payoff diagram?
The diagram is the expiry outcome; before expiry, time value and implied volatility move the position’s value off that line.
Does the payoff diagram include trading costs?
No; costs shift the line down and should be added for narrow spreads.
Draw it before you trade it
TradePulse’s Strategy page draws the payoff and break-evens for its preset structures (short strangle, iron condor, bull put and bear call spreads, calendar, broken-wing butterfly and ratio spreads) from the live chain.
Related terms
- Break-even point, where the line crosses zero
- Bull call spread, the example above
- Naked option, the line that never flattens
- Moneyness, ITM, ATM and OTM on the axis
- Rolling, how adjustments redraw the line
- Option payoff basics, the beginner guide