Using Risk Graphs

Last modified 11:43, 5 Nov 2012

Using Risk Graphs

The Risk Graph on the Graphs' tabbed page is one of Your SOFTWARE's most effective tools for analysis and comparison of strategies.

There are three principle uses for the Risk Graphs:

Click on one of the above topics to link to a more detailed discussion.

Graphically Display a Strategy

The graphic display of each strategy is probably the most obvious use of the Risk Graph, Your SOFTWARE extends this functionality with a number of helpful features.

Confirm Configuration

Different strategies have distinct appearances when plotted on a Risk Graph.

Experienced traders can identify immediately whether the correct transactions have been entered to produce the desired strategy.




Straight Put - 1 leg

Call Spread - 2 legs

Butterfly Spread - 3 legs

For example, a mistake in creating a strategy with two or three legs will be immediately apparent if one leg is missing, or a sell transaction was entered as a buy, etc.

Note - When comparing the risk graph with a text book, be sure the orientation of Your SOFTWARE's Risk Graph has been set to Profit on the vertical axis.

This view, sometimes referred to as the "classic" view, is how textbooks commonly display examples of the various strategy types.

Visually Assess Risk and Profitability

A ready assessment of the strategies' risk and potential rewards can also be quickly made by looking at the position of the break-even point and other price and profit levels.

Align Price Levels

Assessment may be assisted by having the price levels aligned with those in the price chart for the underlying security on the left. To align the prices levels, set the orientation of Your SOFTWARE's Risk Graph to Profit on the horizontal axis.

In this way, the underlying trends observable in a 3, 6, 9 or 12 month price chart can be visually compared to the price and profit levels plotted on the risk graph to its left.

Go to the Properties' General tab topic for information on changing the Risk Graph's orientation.

Compare One or More Strategies with Another or More Strategies

opanlys_graphflotabltop.gifThe ability to superimpose up to six strategies over one another, and the ability to distinguish between them using different colors, allows direct comparisons of their break-even points and other important price and trade levels.

The display is controlled by the commands in the top half of the Analysis pop-up menu.

Click on the graph butn_prichart.gif button to hide/show the strategy in the Options Risk graph.

More than one strategy will be overlaid on the others.

Click on the Strategy's name to view details of the strategy's performance or contents of its legs in the tables at the bottom of the Graphs work-page. Clicking on the name will also enable that strategy's Price Lines, see below.

Click on the down-arrows to open each Strategy's color picker.

For more information, go to the Risk Graph Analysis palette topic.

Show Price Target

In addition to comparing the option's risk graph with its underlying security's price chart, it is possible to link a Price Target in a normal price chart for the underlying asset to the Risk Graph. In this way all the technical analysis tools available in normal Price Charts can be employed to accurately define a price target area. That area can then be superimposed into the corresponding price levels on the Risk Graph.

First draw the target area on the price chart using the Price Target drawing tool:


Then select Show Price Target in the General tab of the Graph's properties dialog box.


The Price Target's price range will be displayed as a band on the Risk Graph.

For more information, go to the Display Price Targets section of the Option Analysis Properties topic.

Test Trading Scenarios

The Risk Graph is initially plotted using data generated from the selected Price Model for the current date.

Once the initial view is displayed, the commands in the bottom half of the Analysis pop-up menu allow users to modify the data and effectively apply user scenarios to the Risk Graph and view the affect of those changes.

Forecast Price

opanlys_graphflotablbotm.gifThe price level is initially set using system data at the underlying asset's Last price.

Users can manually alter the Forecast Price, the new level will be displayed as a dotted blue line, with the price level indicated.

In this manner the user can change the forecast price and see the effect on a selected Profit Line [see below] and the data calculations for each individual profit line displayed in the Profit Line Data table.

Forecast IV Change

The IV used to calculate the initial plot is that which is calculated using the global Price Model.

Users can then manually move the percentage amount up or down using this entry box.

For example, if the system IV is 30.2% and a user enters -10 into this text box, the effective IV used to re-plot the user's IV level will be 20.2%, likewise, entering 5 will result in an effective IV of 35.2%.

Changing the IV will also have an effect on the Profit Lines [see below] and the data calculations for each individual profit line displayed in the Profit Line Data table.


The effect of brokerage on a strategy can be toggled on or off using the Brokerage Entry and/or Exit selections.

For example, if a defensive strategy such as rolling over was being contemplated, the effect of brokerage can be viewed graphically.

Checking or un-checking the a Brokerage box causes the profit line to shift right or left by the brokerage amount, this results in a new break-even level. The direction of the profit line's shifts depends on whether the position is a long (bought) or short (sold).

Profit Lines and Time Decay Analysis

Price Lines graphically show the time value component of an option's price and the effect of time decay.

They are automatically drawn for the current date and three equally spaced intervals between the current date and expiry. The Profit Line for the expiry is the base line of the risk graph.

Profit Line Display

opanlys_graphflotablmid.gifBy default five lines are displayed and are calculated for regular intervals between the current date and the expiry.

The current settings of the Profit Lines can be viewed in the middle section of the Analysis palette.

By default, when only one strategy is displayed in the Risk Graph, the lines are multi-colored.

opanlys_graphflotablred.gifWhen more than one strategy is displayed, the Profit Lines assume the color assigned to the strategy, each line having a slightly different shade of the same color.

Select a strategy, and its lines will populate the line control section in the middle of the Analysis palette.

The days to expiry for each line will also display. Different strategies can be written for options with different expiration periods. When a single strategy has legs with different expiry months, the earliest month of expiry is used to calculate the Profit Lines.

The check-box to the left of each line controls the line's display. These display settings will be applied to all strategies.

All of these default settings can be changed by the user in the Profit Lines tabbed page of the Graph Properties dialog box. Changes to Profit Line default settings will affect all Risk Graphs, for more information, go to the Profit Lines Properties topic.

Profit Line Data

opanlys_graphflotablline.gifSelect a particular line to display details calculated for the Profit Line on the date indicated.

In the example at right, the Profit Line for 24 days to expiry has been selected.

The Date is calculated from the current date and details of price and trade data calculated for that date are displayed in the first table at the bottom of the Graphs tabbed page, see below.

Any manual changes made in to forecast Price or IV Change levels [see Test Trading Scenarios above] will also be displayed and affect the other data.

The Forecast Price for 80 days to expiry, Profit/Loss, and the Greeks for that day will also be calculated and displayed.


Left end of Strategy Information Row


Right end of Strategy Information Row

The Strategy Information Row contains a Percentage to Double (% to D) column. Whenever you have a strategy, whether it be one or multiple legs, the strategy will have a cost. The  Percentage to Double column displays the percentage the price must move in order to recover the initial cost, plus make the same amount in profit. For example, if the cost of the strategy is -$60, the Percentage to Double (% to D) column would display the percentage increase necessary to return the outlay to credit, then increase the profit by 100%, taking the amount to $60.

The Maximum Profit and Maximum Risk are also displayed. These are determined by the strategy's structure and do not change with the days to expiry.

Transactions (Strategy Legs) Data

The final table at the bottom of the Risk Graphs tabbed page contains details of the selected strategy's transaction legs

Strategy Leg Details

The first eight columns on the left show details of each leg of the actual strategy as it was recorded by the trader at the time of the trade.


Left end of Strategy Legs Table


Right end of Strategy Legs Table

Current Market Value / Activity of Legs

The ten columns on the left of the Strategy Legs table use price data and the price model settings to calculate the current value of the position, and show current market activity for each of the contracts used in the strategy.

Summary of Strategy Position

The row immediately below the table contains summarized profit/loss figures, in bold font, on a per stock basis as well as the overall trade position, taking commissions into account.

The overall trade position is expressed as being in Credit or Debit.

Select a different Strategy from the Analysis palette and the table will be populated with details of its transaction legs.

Double left mouse click on a leg to open its Edit Transaction dialog box.

For more information on editing strategies, refer to the Strategies topic.

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