A pay off for derivative contracts is the likely profit loss that would accrue to the market participate with change in the price of the underlying asset. The nationality characteristic of option is a non linear payoff for options. In simple words, it means that the losses for the buyer of option are limited. However, the profits are potentially unlimited. For a writer, the pay off exactly the opposite. His profits are limited to the option premium. However, his losses are unlimited. These non linear payoffs are fascinating as they end themselves to be used generate various payoffs by using combinations of options and the underlying. We illustrate below six basic payoffs.
Payoff Profile of Buyer of Asset: long Asset
In the basic position, an investor buys the underlying asset, the Nifty for instance, for 1.220 and sells it at a future date at an unknown price, S. Once it is purchased, the investor is said to be long the asset. The investor would make profit the index goes up, if the index falls he would lose.
Payoff Profile for Seller of Asset: Short Asset
In this basic position an investor shorts the underlying asset, the Nifty for instance, for 1.220 and buys it back at a future date at an unknown price, S. Once It is old, the investor is said to be short the asset. The investor sold the index at 1.220. If the index falls, he profits. If the index rises the loses.