Derivatives and advanced market conceptsModule 1, lesson 7 of 21
Option payoff diagrams and breakevens
Payoffs at expiry for long and short calls and puts, breakeven calculations and a simple spread, with the losing side shown as clearly as the winning side.
In this lesson
- Build a payoff table at expiry for long and short calls and puts.
- Calculate breakeven prices for option buyers and sellers.
- Identify the maximum gain and maximum loss of each basic position.
- Combine two options into a spread and read its payoff.
Builds on
- Moneyness, intrinsic value and time valueAt expiry, an option is worth only the intrinsic value explained there.
On this page
In simple terms
A payoff diagram shows the profit or loss of an option position at expiry for every possible price of the underlying. In this lesson each payoff is shown as a table: read down the rows to see where a position wins, breaks even and loses. The option payoff calculator draws the diagram, with breakevens and the maximum gain and loss, for any strikes and premiums.
At expiry, an option is worth only its intrinsic value, as the intrinsic and time value lesson explains. The result is that value minus the premium paid (for a buyer) or the premium received minus that value (for a seller).
Breakevens
| Long call breakeven | strike + premium |
|---|---|
| Long put breakeven | strike − premium |
| Short call and short put | same breakevens as the buyers |
The four basic positions
Worked example: Made-up options with strike ₹1,000; call premium ₹30, put premium ₹25; results per share at expiry
| Price at expiry | Long call | Short call | Long put | Short put |
|---|---|---|---|---|
| ₹700 | −30 | +30 | +275 | −275 |
| ₹900 | −30 | +30 | +75 | −75 |
| ₹975 | −30 | +30 | 0 | 0 |
| ₹1,000 | −30 | +30 | −25 | +25 |
| ₹1,030 | 0 | 0 | −25 | +25 |
| ₹1,100 | +70 | −70 | −25 | +25 |
| ₹1,500 | +470 | −470 | −25 | +25 |
| Position | Breakeven | Maximum gain | Maximum loss |
|---|---|---|---|
| Long call | ₹1,030 | No fixed limit | ₹30, the premium |
| Short call | ₹1,030 | ₹30, the premium | No fixed limit |
| Long put | ₹975 | ₹975, if the price falls to zero | ₹25, the premium |
| Short put | ₹975 | ₹25, the premium | ₹975, if the price falls to zero |
Multiply each figure by the lot size to get rupee amounts for one contract. For a made-up lot of 500, a short call at ₹1,500 loses ₹2,35,000.
The seller's side
Option sellers receive a small, fixed amount and take on a large, sometimes open-ended risk. The table shows why "the seller's maximum loss is the premium" is wrong: the premium is the seller's maximum gain. The buyers and sellers lesson discusses why selling options can look like steady income until it does not.
Combining options: a spread
Positions can be combined. A common example is a bull call spread: buy a call and sell a call with a higher strike.
Worked example: A made-up bull call spread
Buy the ₹1,000 call for ₹40; sell the ₹1,100 call for ₹12. Net cost ₹28 per share.
| Price at expiry | Long ₹1,000 call | Short ₹1,100 call | Spread result |
|---|---|---|---|
| ₹950 | −40 | +12 | −28 |
| ₹1,028 | −12 | +12 | 0 |
| ₹1,100 | +60 | +12 | +72 |
| ₹1,200 | +160 | −88 | +72 |
| Maximum loss: net premium paid | ₹28 |
|---|---|
| Breakeven: 1,000 + 28 | ₹1,028 |
| Maximum gain: (1,100 − 1,000) − 28 | ₹72 |
Selling the higher call reduces the cost and caps the gain. Both the best and worst outcomes are known in advance, at expiry.
What payoff diagrams leave out
Payoffs at expiry do not show:
- Changes before expiry, from price moves, time decay and volatility, as the Greeks lessons explain.
- Margin calls on short positions, which can force a seller out before expiry.
- Costs, taxes and slippage, as the liquidity lesson explains.
- Gaps and settlement risks, as the derivative risks lesson explains.
Why it matters
Before any option trade, knowing the breakeven, the maximum gain and especially the maximum loss is basic risk management. Payoff tables make the losing side as visible as the winning side.
Limitations
These are expiry payoffs per share, before costs. Real positions are valued continuously before expiry, and lot sizes, margins and settlement rules are set by the exchange and change over time.
Common mistakes
- Believing a seller's maximum loss is the premium.
- Forgetting to include the premium in breakeven.
- Ignoring the short leg's risk in combined positions.
- Looking only at the expiry payoff and ignoring the path before expiry.
Try it yourself
- Build a payoff table for a long put with strike ₹500 and premium ₹15, at prices from ₹300 to ₹600.
- Build the same for a short call with strike ₹500 and premium ₹18.
- Design a bear put spread, buying the ₹500 put and selling the ₹450 put, with premiums of your choice, and find its breakeven, maximum gain and maximum loss.
Key takeaways
- At expiry, an option is worth its intrinsic value. Subtracting the premium paid, or adding the premium received, gives the result.
- A long call breaks even at strike plus premium; a long put at strike minus premium. Sellers break even at the same prices.
- Buyers' losses are limited to the premium. A short call's loss has no limit, and a short put's loss can be almost the whole strike value.
- Combining options, such as buying one call and selling another, changes the shape of the payoff and caps both gains and losses.
- Payoff diagrams at expiry ignore what happens before expiry, such as margin calls and changes in volatility.
Check your understanding
Try the numbers yourself
- Option payoff calculatorWhere does an option position make or lose money at expiry?
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Terms used in this lesson
- Payoff diagram
- A chart or table showing the profit or loss of a derivative position at expiry for each possible price of the underlying.
- Breakeven
- The price of the underlying at which a position neither gains nor loses, before costs.
- Call option
- A contract giving the buyer the right, but not the obligation, to buy the underlying at the strike price.
- Put option
- A contract giving the buyer the right, but not the obligation, to sell the underlying at the strike price.
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This lesson is general education, not investment advice. Examples use made-up or clearly dated figures to explain ideas; they are not recommendations. Read the disclaimer.