The Limitations In Profit And Loss Graphs

Profit and loss graphs have several limitations that you need to be aware of. The first limitation is that the risk graph shows our profit and loss at the time of expiration, not before.

This is important for several reasons. Most beginning options traders see a profit and loss graph for their strategy and note the breakeven price or prices. Now, in their mind, this is the price their underlying must get to start making any money. 

If you hold your options to expiration, this is true, but it is not true if you are looking to trade in and out of the positions before expiration.

When you begin to add time into a risk graph the lines are no longer perfectly straight. Anytime you see a curve involved in the graph you know you are dealing with options over different time spans. 

This can make it difficult to understand exactly what your profit and loss will be at expiration because those numbers are ambiguous.

Another limitation and this one is minor is that profit and loss graphs don't account for commissions. Option commissions are small compared to regular trading commissions. As with any trading, however, everything must be taken into account when deciding on the best strategy. 

Some option strategies are commission intensive such as an iron condor and when you have to adjust the position this commission total can have a negative impact on your overall profit.