Payoff chart

A payoff chart answers one question in a picture: at every possible price the underlying could reach on expiry, how much would this position make or lose?

The X-axis carries the market price of the underlying at expiry. The Y-axis carries profit above the line and loss below it. Different positions draw very different shapes on that same pair of axes, and reading the shape is most of what payoff analysis is.

For a futures position, the workbook's tables and charts show a straight, linear line running through zero at the contract price. A long futures position bought at Rs 100 makes Rs 1 for every rupee the underlying rises above 100 and loses Rs 1 for every rupee it falls below 100 — profit rising one-for-one with price. A short futures position at Rs 100 is the mirror image: it profits as price falls and loses as price rises, still perfectly linear.

Both long and short futures payoffs are symmetric: the potential gain and potential loss are unlimited and move at exactly the same rate in both directions. Options break that symmetry. A long call or put buyer's loss is capped at the premium paid, however far the price moves against them, while their gain can run much further — an asymmetric payoff, which is why options and futures are drawn, and read, differently.

An investor goes long one futures contract at Rs 100. At expiry:

Expiry price 98  →  Pay-off = 98 − 100 = −Rs 2  (loss)
Expiry price 100 →  Pay-off = 100 − 100 = Rs 0
Expiry price 102 →  Pay-off = 102 − 100 = +Rs 2  (profit)

Plotted, these points form a straight line through the origin at Rs 100 — the classic long futures payoff chart. A short futures position at the same Rs 100 produces the exact mirror image: a loss of Rs 2 when price rises to 102, and a profit of Rs 2 when price falls to 98.

Now compare a long put bought for a Rs 0.30 premium with a strike of Rs 98.50. If the underlying settles anywhere at or above Rs 98.50, the loss is capped at the Rs 0.30 premium — the chart goes flat, not down forever, which is exactly the asymmetry a futures chart does not have.

Chapter 20 (Exchange Traded Interest Rate Futures), section 20.2, builds the long and short futures payoff tables and charts step by step. Chapter 21 (Exchange Traded Interest Rate Options) repeats the exercise for long and short calls and puts, contrasting their asymmetric shape with the futures chart. Expect a question asking you to identify a position from its payoff chart, or to state maximum profit and loss from a described chart.

• Futures payoffs are symmetric and linear; option payoffs are asymmetric, with a buyer's loss capped at the premium.
• The X-axis is the underlying's price at expiry, not time, and profit is read as height above or below zero on the Y-axis.
• A short position's chart is the mirror image of the corresponding long position's chart, reflected around the zero line.
• A cash-settled contract's chart still shows the same shape as a physically settled one — only the actual delivery differs, not the profit and loss pattern.