Profit Charts and Option Strategies

Profit Charts

According to Weber (2008) the introduction of profit charts circa 1870 helped clarify the nature of forward, futures and options. They simplified the explanation of combinations and helped elucidate derivative portfolios that previously had been explained legalistically or with monotonous numerical examples. Weber (2008) noted that profit charts made it possible to explain a derivative contract with a single graph instead of verbose explanations and freed pamphleteers from dissecting numerically complex scenarios. "Both Bachelier (1900) and Bronzin (1908) used profit charts in their works. It is unlikely that Bachelier and Bronzin, who had studied mathematics and physics, would have turned to the analysis of option pricing if profit charts had not provided an easy way for young scientists, who lacked experience in financial markets, to learn about derivatives." The first profit charts were published by Lefèvre (1873) and Moser (1875). Some examples are provided below.

Profit Chart, Option Strategies and Premia based on Black Scholes

Below, we set out the option trading strategies introduced by John C Hull. We set up payoffs in excel and Python. The synthetic option positions are explained in the playlist below.

Synthetic Pay Offs

Synthetic Long Call, Synthetic Long Put, Synthetic Short Call, Synthetic Short Put

Bull Spread using Calls

Bear Spread using Calls

Bull Spread using Puts

Bear Spread using Puts

Butterfly Spread using Calls

Butterfly Spread using Puts

Butterfly and Reverse Butterfly using Calls

Butterfly Trade using Calls

Reverse Butterfly using Calls

Long Straddle, Reverse (Short) Straddle, Long Strip, Long Strap and Strangle

Long Straddle

Reverse (Short) Straddle

Strip

Strap

Strangle

Calendar Spread and Reverse Calendar Spread

Calendar Spread using Call Options

Reverse Calendar Spread using Call Options

Some Options Payoffs in Python