Reading the diagram
A payoff diagram plots your profit or loss at expiry against every possible stock price. It's the single most useful chart in options trading — it tells you, at a glance, your breakeven point, your maximum gain, and your maximum loss, before you ever place a trade.
Buying vs. selling
Try switching between buying and selling below. Notice how selling an option flips the shape upside down: your max gain becomes capped at the premium you collected, while your downside opens up. That trade-off — capped, steady income versus open-ended risk — is the core decision behind every options strategy.
What this diagram leaves out
One thing this diagram intentionally leaves out: time. It shows your P&L only at expiry. Before expiry, an option's price also depends on how much time is left and how volatile the stock has been — that's what the Greeks module covers next.