A payoff diagram is a chart that shows how much an option position makes or loses at different prices of the underlying (NIFTY, BANKNIFTY, a stock or a commodity). It answers the question every trader should ask before placing an order: what happens to me if the price goes there?
Every strategy page on ScreenerCharts, and the strategy builder, draws one. Once you can read the shape, you can understand a new strategy in seconds without memorising formulas.
The two axes
- The horizontal axis (along the bottom) is the price of the underlying, for example NIFTY from 24,400 to 25,600. The current price is usually marked with a vertical line.
- The vertical axis (up the side) is the profit or loss of the whole position, per unit or per lot. Above the zero line is profit; below it is loss.
Read it left to right like a "what if" table: "If NIFTY ends at 24,800, I lose this much; at 25,400, I make this much."
A first example: buying a call
NIFTY is at 25,000. You buy the 25,000 call for ₹180. At expiry, the call is worth NIFTY minus 25,000 if NIFTY is above 25,000, and nothing otherwise. Subtract the ₹180 you paid and you get the payoff:
| NIFTY at expiry | Long 25,000 call | Bull call spread 25,000 / 25,200 |
|---|---|---|
| 24,800 | −180 | −85 |
| 25,000 | −180 | −85 |
| 25,085 | −95 | 0 |
| 25,180 | 0 | +95 |
| 25,200 | +20 | +115 |
| 25,400 | +220 | +115 |
| 25,600 | +420 | +115 |
Plotted, the long call is a hockey stick: flat at −180 to the left of the strike, then rising one-for-one to the right. The break-even is 25,180 (strike plus premium). The loss is capped at ₹180; the profit is open-ended. See the long call guide for more.
The second column is a bull call spread: buy the 25,000 call at ₹180 and sell the 25,200 call at ₹95, a ₹85 debit. Its line is flat at −85 on the left, rises between the strikes, and is flat again at +115 on the right. The sold call has cut off the open-ended upside in exchange for a lower cost and a closer break-even (25,085).
The four things to read on any diagram
- Break-even points. Where the line crosses zero. A position can have one (a long call), two (a straddle or iron condor) or more.
- Maximum profit. The highest point. If the line keeps climbing off the edge of the chart, the profit is open-ended.
- Maximum loss. The lowest point. If the line keeps falling off the edge, the loss is open-ended. This is the most important thing to check.
- The slope at the current price. A line rising to the right means the position gains when the price rises (bullish). Falling to the right means bearish. Flat means neutral, for now.
Long call break-even = strike + premium; long put break-even = strike − premium
Expiry line versus today's line
Most payoff charts show two lines:
- The expiry line shows the result if you hold until the options expire. Options then have only intrinsic value, so the line is made of straight pieces with sharp corners at each strike.
- The today line (sometimes called T+0) shows the profit or loss if the price moved there right now, with time value still in the options. It is a smooth curve that sits between the corners.
The gap between the two lines is time value. As expiry approaches, the today line slowly bends toward the expiry line. That is theta decay made visible. A change in implied volatility also moves the today line up or down without changing the expiry line, which is why a position can show a loss today even if the expiry picture looks fine. The option Greeks guide explains these sensitivities.
Common shapes
| Strategy | Shape | Maximum profit | Maximum loss |
|---|---|---|---|
| Long call | Hockey stick up to the right | Open-ended | Premium |
| Long put | Hockey stick up to the left | Large (to zero) | Premium |
| Short put | Flat on the right, falls to the left | Premium | Large |
| Long straddle | V | Open-ended | Premium |
| Short straddle | Upside-down V | Premium | Open-ended |
| Iron condor | Table top with sloping legs | Credit | Wing width − credit |
| Butterfly | Tent with a sharp peak | Wing width − debit | Debit |
If you see a line that keeps going down off the edge of the chart, that strategy has open-ended risk on that side. The iron condor and butterfly guides walk through two of these shapes with numbers.
Putting the expected move on the diagram
A payoff diagram tells you what happens at each price, but not how likely each price is. The expected move fills that gap. Here is NIFTY's expected range for the current expiry, from the ATM straddle:
Picture this range as a shaded band on the diagram. A short strangle whose break-evens sit outside the band is betting on a smaller-than-expected move; a long call whose break-even sits outside it needs a larger-than-expected rally. This one comparison often says more about a trade than its maximum profit.
Building a diagram from the option chain
The premiums you put into any payoff come from the option chain. Today's NIFTY chain:
Pick a strike, note the call or put premium, and you can work out its expiry payoff by hand: strike, premium, break-even, maximum loss. The strategy builder does the same for many legs at once and draws both lines.
Working out a payoff by hand
You do not need software to check a simple position. For each leg, work out its value at a chosen expiry price, then add them up:
- A call is worth the price minus the strike, or zero if that is negative.
- A put is worth the strike minus the price, or zero if that is negative.
- For a bought option, subtract the premium paid; for a sold option, add the premium received and subtract the option's value.
Do this at each strike and at a couple of prices well beyond the outer strikes, and you have the corners of the expiry line. Join them with straight lines and you have the whole diagram. Checking a few points by hand is a good habit even when using a tool, because it catches a leg entered the wrong way round.
Common mistakes when reading payoffs
- Reading only the expiry line. If you plan to exit before expiry, the today line is the one that matters.
- Ignoring the chart edges. A strategy can look safe inside the default price range and hide a steep loss just outside it. Widen the range.
- Forgetting quantity. A per-unit payoff of ₹100 is a much bigger number per lot. Always convert to rupees per lot.
- Treating the peak as the expected result. The maximum profit is often reached only at one exact price.
- Leaving out costs. Diagrams usually ignore brokerage, taxes and slippage, which lower every point of the line.