Shows value of an option on the expiration date,
Y-axis plots exercise value or "intrinsic value"
X-axis plots the price of the underlying asset.
payoff - the price of the option at expiry date
We can plot the value of an instrument at expiry as a function of the underlying in what is known as a payoff diagram.
A payoff function is defined as some function of the underlying asset at expiry.
These payoff diagrams are useful as they can help to simplify the analysis of complicated strategies.
Links to relevant payoff diagrams
Payoff diagrams are useful for combinations of options rather than just one
Shows the range of potential strategies made possible by options
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