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YouTube T3-01: Derivative Payoff/Profit Diagrams Introduced

Nicole Seaman

Director of FRM Operations
Staff member
Payoff is the future cash flow. For a long option, profit = payoff - initial premium (aka, cost). For a short option position, profit = premium - payoff. Here is an interesting difference between the call and the put: the call's payoff/profit is theoretically uncapped, but the payoff of the put is capped at the exercise price (because the future stock price cannot drop below zero!).

David's XLS is here: https://trtl.bz/2ZNGsTK