The P/L Chart
The P/L (Profit & Loss) chart helps you visualize an option strategy’s theoretical profits or losses at expiration. This is a great way to gain some insight into any particular options strategy before you enter into a position.
The vertical Y-axis represents the theoretical profit (+) and loss (-) range. Anything above zero represents theoretical profit while the area below represents theoretical loss. Both values assume the option is held until expiration.
The horizontal X-axis represents the stock price at expiration. When it comes to a calendar spread, which contains both long and short options at identical strike prices across two different expiration dates, the expiration of the front month option is the assumed expiration date.
The chart can help you gauge the theoretical risk and reward of any given options strategy. This is one of the most important keys to choosing a strategy because you’ll get an idea of how much money you can potentially make or lose. This assumes all options are held until expiration and not closed, exercised, or assigned before then.
Keeping track of your breakeven is another important factor. Assuming you hold the position to expiration, this is the price the underlying stock must be above or below in order to potentially make money at expiration. Helpfully, this includes any premium paid or collected when the position was established.
Example: Let’s revisit the above MEOW 237 call
The MEOW 237 call has a premium of $2.00. The theoretical max profit would be unlimited because there’s no upper limit on how much the stock can potentially gain. You also know that you need the price to hit $239 to break even at expiration. The breakeven price for a long call is the strike price (237) plus the premium paid ($2). The theoretical max you can lose (max loss) is going to be $200, which is the premium paid ($2 x the contract multiplier of 100).
Keep in mind, this graph is only showing potential profit and loss at expiration. Actual gains may vary prior to expiration. For more helpful options education, be sure to check out the options trading essentials page.
The P/L chart is interactive and as you select different contract strategies, it will adjust accordingly. At Robinhood we categorize them into Level 2 and Level 3 strategies. Here are a few of the most common strategies you can examine using the P/L chart.
SETUP: Sell a put short (you must have the money in your account equivalent to buy 100 shares at the strike price of the put, aka “cash-secured”)
For a deeper analysis of this strategy, check out our detailed primer on trading calls and puts.
SETUP: Long 100 shares of stock + short higher strike call (usually with a short-term expiration; ~20-45 days to expiration)
For a deeper analysis of these strategies, check out our detailed primer on trading calls and puts.
SETUP: Long call + long put at the same strike price, meaning you have the right to buy and sell shares at the same strike price.
SETUP: Long call + put options, but the call option has a higher strike price than the put option.
SETUP: Put credit spread (short put + lower long put) placed below the current stock price
Call credit spread (short Call + long higher strike call) placed above the current stock price
For a deeper analysis of spread strategies, check out our detailed primer on trading spreads.
SETUP: Short position + long position on the same underlying stock at the same strike price, but with different expiration dates.
SETUP: Put credit spread (a short put + a long put) + call credit spread (a short call + a long call).
The Profit and Loss Chart (the “Chart”) assumes positions will be held until expiration. Actual losses may exceed calculated values due to changes in implied volatility, early assignment and ex-dividend dates, among other factors.
The Chart performs hypothetical calculations based on model assumptions and other inputs, which may not reflect actual market conditions and do not guarantee future results. The calculations do not incorporate taxes, fees, or annualized dividend yields. Failure to exercise an in-the-money options contract can cause actual profits and losses to differ from calculated values. The maximum loss on a spread position remains limited only as long as the integrity of the spread is maintained.
Options carry a significant level of risk and are not suitable for all investors. Certain complex options strategies carry additional risk. Please read the Characteristics and Risks of Standardized Options. Options transactions are often complex and may involve the potential of losing the entire investment in a relatively short period of time. Certain complex options strategies carry additional risk, including the potential for losses that may exceed the original investment amount.
Any hypothetical examples are provided for illustrative purposes only. Actual results will vary.
Content is provided for informational purposes only, does not constitute tax or investment advice, and is not a recommendation for any security or trading strategy. All investments involve risk, including the possible loss of capital. Past performance does not guarantee future results.
Robinhood Financial does not guarantee favorable investment outcomes. Customers should consider their investment objectives and risks carefully before investing in options. Because of the importance of tax considerations to all options transactions, the customer considering options should consult their tax advisor as to how taxes affect the outcome of each options strategy. Supporting documentation for any claims, if applicable, will be furnished upon request.