Option strategies explained: payoff diagrams for spreads, straddles…

An option strategy is a combination of calls, puts and sometimes stock, chosen to make a specific bet. A spread bets on direction with a capped gain and a capped loss. A straddle bets on a large move in either direction. An iron condor bets that the price stays in a range. A covered call earns income in exchange for giving up upside. The payoff diagram shows the bet at a glance; the premium tells you what it costs.

This guide prices six common structures on the same stock with the same inputs, so their trade-offs are directly comparable. The inputs are spot $100, 30 days to expiry, 25% volatility and a 4% rate, with Black–Scholes premiums. Every figure is per share; one contract is 100 shares. You can load each structure as a template in the free option strategy builder and change any input.

Expiry profit per share for six option strategies on the same stock

How do you read a payoff diagram?

The horizontal axis is the stock price at expiry; the vertical axis is profit per share after the premium paid or received. Three features matter:

The breakeven, where the line crosses zero.
The maximum profit and maximum loss: the flat sections, or the absence of one, which means unlimited.
The slope between the breakevens, which is the position's delta at expiry.

A diagram shows the position on expiry day only. Before then, the value also depends on time left and volatility, and the curve is smooth rather than kinked. The builder draws both curves so you can see the difference.

Long call: the simplest bullish bet

Buy the 100-strike call for ** $3.02**. If the stock finishes above$ 103.02 you profit, and the upside is unlimited. If it finishes at or below $100, you lose the whole premium.

The call needs the stock to move up by enough, soon enough. With 30 days left, a one-standard-deviation move at 25% volatility is about $7.17, so the breakeven is less than half of a typical move. Time decay works against you every day the stock stands still.

Bull call spread: cheaper, but capped

Buy the 100 call and sell the 110 call. The sale brings in premium, so the net cost falls to $2.67:

Maximum loss is $2.67, below$ 100.
Maximum profit is $10 −$ 2.67 = ** $7.33**, at or above$ 110.
Breakeven is $102.67.

Compared with the long call, you pay 35 cents less and your breakeven is lower, but you give up everything above $110. Use it when you expect a moderate rise, not a rally. The short call also cancels much of the long call's volatility exposure, so the spread is closer to a pure direction bet.

Bear put spread: the same idea for a fall

Buy the 100 put and sell the 90 put for a net $2.50:

Maximum profit is $7.50 at or below$ 90.
Maximum loss is $2.50 at or above$ 100.
Breakeven is $97.50.

It mirrors the bull call spread. A slightly lower cost reflects the positive interest rate, which makes calls a little dearer than puts at the same strike.

Long straddle: betting on movement, not direction

Buy both the 100 call and the 100 put for $5.71** in total. You profit if the stock finishes below **$ 94.29 or above **

105.71**. The worst case is a finish exactly at

100, where both options expire worthless.

A useful rule of thumb: an at-the-money straddle costs about 0.8 × spot × volatility × √(time), here 0.8 × 100 × 0.25 × √(30/365) ≈ $5.73. The factor 0.8 is √(2/π), the mean absolute value of a standard normal variable. So the straddle's price is roughly the market's expected absolute move. Buying it says you expect more movement than the implied volatility suggests. It is most popular before scheduled events such as earnings, when everyone else expects movement too, and the price reflects that.

Iron condor: getting paid for a quiet market

Sell the 95 put and the 105 call, and buy the 90 put and the 110 call as protection. You receive a net credit of $1.52:

Maximum profit is $1.52, if the stock finishes between$ 95 and $105.
Maximum loss is $5 −$ 1.52 = ** $3.48**, below$ 90 or above $110.
Breakevens are $93.48 and$ 106.52.

The condor is the opposite bet to the straddle. It collects time decay while the stock stays in the range and loses when it breaks out. The bought wings cap that loss, which is what separates an iron condor from a naked short strangle with unlimited risk. Its profit profile is asymmetric in an uncomfortable way: many small wins and occasional larger losses. Size it for the losses.

Covered call: income in exchange for upside

Own the stock at $100 and sell the 110 call for **$ 0.35**:

Breakeven falls to $99.65.
Maximum profit is $10.35, if the stock finishes at or above$ 110.
Downside is almost the same as owning the stock: the premium cushions only the first 35 cents of a fall.

A covered call has the same expiry payoff shape as a short put, by put–call parity. Both earn a small premium in quiet markets and carry the stock's full downside. The covered call glossary entry covers the mechanics of assignment.

The six strategies side by side

Strategy	Cost (credit)	Maximum profit	Maximum loss	Breakeven(s)
Long call 100	$3.02	Unlimited	$3.02	$103.02
Bull call spread 100/110	$2.67	$7.33	$2.67	$102.67
Bear put spread 100/90	$2.50	$7.50	$2.50	$97.50
Long straddle 100	$5.71	Unlimited	$5.71	$94.29 and$ 105.71
Iron condor 90/95/105/110	($1.52)	$1.52	$3.48	$93.48 and$ 106.52
Covered call, sell 110	($0.35)	$10.35	$99.65	$99.65

How do you choose between them?

Start from the view, then pick the structure that expresses it most cheaply:

Direction, with conviction about size: a long call or put.
Direction, moderate move: a vertical spread, which costs less and has less volatility exposure.
A big move, unsure which way: a straddle, or a strangle with out-of-the-money strikes for a lower cost.
No big move: an iron condor or a butterfly, collecting time decay with capped risk.
Mildly bullish on stock you own: a covered call.

Then check what the payoff diagram doesn't show. Look at how the position's delta, gamma, theta and vega behave before expiry. Ask whether early assignment is possible on American-style options, and whether the bid–ask spreads on four legs eat the credit. The guide to the option Greeks explains each sensitivity with worked numbers.

Where to go next

What does an option price actually mean?
A Python option pricing lab
The Strategy Lab has payoff diagrams and monthly roll backtests for all 58 option structures in 151 Trading Strategies, starting with the covered call.
The option trading strategies lesson.

References

Kakushadze, Z. and Serur, J. A. (2018). 151 Trading Strategies. Palgrave Macmillan. SSRN 3247865.

Premiums in this article are Black–Scholes values with the stated inputs and no dividends. Market prices differ because of the volatility smile, bid–ask spreads and early-exercise features.