As the option's holder you have the right, but not obligation to exercise. But you don't need to (and should not) exercise. But of course this is virtually impossible in the real world, because 1) early assignment is unlikely as the person exercising the option would be giving up time value and 2) the stock getting both below $40 and above $50 is unlikely (though possible).Ī case when you could lose more than $400 is if you exercise your long put as price reaches $35 (get a short position in the stock at $3,500) and the stock turns around and goes up above the $40 strike. So having both your short legs assigned early actually leads to a profit of $1,000 + $100 premium received. If you get assigned the $40 put and hold the stock, and the market later turns and gets to $55, and also your $50 call gets assigned early, the assignment actually means you sell the 100 shares you now own (from the $40 put assignment) to the call holder for $50 = $5,000 cash inflow = profit of $1,000 on the stock (and you still hold the long options and keep the $100 initial cash). Loss on the stock is $500, with your initial premium received when opening the iron condor total loss is $400. If the stock ends up at let's say $30 at expiration, you simply exercise your long $35 strike put and sell the stock for $35 = $3,500 cash inflow. If the underlying stock gets to let's say $35 before expiration and your short $40 put gets assigned early (so you get 100 shares of stock from the put holder for cash outflow of $4,000), you still can't lose more than $400, because you still have the long $35 put as hedge + the $100 cash from net premium received. 009) * 20.Actually you can't lose more than what the diagram shows, even with American options, and these diagrams apply to both types.

(a) At the expiration date, the long position’s payoff is (0. At expiration, the spot price is $0.0083 per yen. We have pointed out earlier that the long makes money when the price rises and the short makes money when the price falls.Īn investor sells 20 million yen forward at a forward price of $0.0090 per yen. Payoff diagrams are widely used because they summarize the risk of the position at a glance. These payoffs do not include any costs or gains earned when purchasing the assets today.

Pay0ff diagrams show the pay0ff of a position at expiration. Also note that a long forward’s maximum loss is the forward price whereas the maximum gain is unlimited.įor a short forward, the maximum gain is the forward price and the maximum loss is unlimited. Note that both the long and short forward payoff positions break even when the spot price is equal to the forward price. For the short position: the payoff of a forward contract on the delivery date is K _PTįigure shows a payoff diagram on a contract forward.

Payoff vs profit diagram short position