Swim Lessons: Lost at Sea? The Risk Profile Tool Can Be Your Message in a Bottle

While options trading involves risk, these risks can be analyzed, monitored and simulated with the thinkorswim® Risk Profile tool.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Ship Aground: The Risk Profile Tool is Your Message in a Bottle
4 min read

If you were stranded on a deserted island and could pick three things with which to survive, what would you choose? Here’s what I’d pick: sunscreen, a bag of pretzel sticks, and the Risk Profile tool on the thinkorswim® platform from TD Ameritrade.

OK… so that might’ve been a bit of a stretch. However, when it comes to assessing risk on a potential position, the Risk Profile tool would make a valuable addition to any trader's survival kit. 

The following, like all of our strategy discussions, is strictly for educational purposes only.  It is not, and should not be considered, individualized advice or a recommendation.

No Corkscrew, But Still Quite Useful

The Risk Profile tool can help investors visualize the potential profit/loss on a position. They can even adjust certain parameters such as: the price of the underlying, number of days until expiration, and changes in implied volatility, to see how it might affect the value of an option. Remember, though, it’s just a theoretical estimation.

To pull up the tool on thinkorswim®, click on the Analyze tab, and then Risk Profile. Next, you’ll want to add a simulated trade, which you can do by clicking on Add Simulated Trades, just to the left of the Risk Profile button.

As you type in a ticker, an options chain pops up. Notice how the Add Simulated Trade page looks and acts similar to the All Products page on the Trade tab? There’s a reason for that. This tool is most beneficial prior to placing a trade, when you’re assessing the risk of a potential position. Now, once you choose an option and a strategy, click Risk Profile, and there it is in all its visual glory. For example, figure 1 shows the risk profile of a long 110-strike call option in a sample stock. 

Risk Profile of Long Call


The risk profile showing the potential P/L of a long 110 call purchased for $4.90 with 47 days until expiration. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

The Tool Explained, From (A) to (H)

Figure 1 shows the risk profile of a 110-strike call that was bought for $4.90 (times the options multiplier of 100 equals $490 per contract, plus transaction costs), and expires on May 20th. Across the bottom of the graph is the price of the underlying (A). The left side shows dollar amounts for profit or loss (B). Each underlying price corresponds to a profit or loss as shown by the lines on the graph (C).

This graph has two lines: a curved pink line and an angled blue line. The pink line represents the current date (April 2, 2017 in figure 1). The angled blue line shows the P/L at expiration (May 20, 2017). In the platform, when you hover your cursor anywhere on the graph, the corresponding P/L shows in the bottom left corner (D).

For example, if the underlying stock were to reach $117 on the date in figure 1, the trade is projected to make about $268, excluding transaction costs. This estimate changes to $211 if the position is held until expiration.

If the underlying stock were to drop to $107, on the current date, the trade would have a theoretical loss of about $340. At expiration, a price of $107 in the underlying would result in a loss of the entire premium paid, $490, plus transaction costs.

The short red vertical mark on each line (E) represents the breakeven point based on the time to expiration.

That light grey shaded area isn’t a mirage. It represents the potential range of the underlying between today and expiration, based on a one-standard deviation move in the underlying. (A good rule of thumb is that, about 68% of the time, a stock is expected to be within one standard deviation of the current price.)

You can change the grey shaded area to show a higher or lower probable range (F), and you can also change the date on which it’s calculated (G).

Following The Tides With Risk Profile 

Want to see the risk profile on other dates prior to expiration, or at other levels of volatility? The Lines and Step buttons can help.

To see  the potential effects of time decay on your trade, click on the Lines button (H) and change it to “+3 @ Day Step” and to the right of that change Step to 7, for example. Now you have three more curved lines, each 7 days apart, as shown in figure 2. Now you can estimate the potential P/L of your trade, based not only on the price of the underlying, but also with the passing of time.

Effects of Time Decay on Long Call


The risk profile for the same 110 call, but with the calendar rolled ahead in three 7-day increments. Chart source: thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Want to see how a trade might fare with changes to implied volatility? Click on Lines again and change it to Vol Step, choosing from 1-4 lines, and in Step select the change in the implied volatility you’d like to preview. For instance, with +3 lines at a step of +5% you’ll see the effects of implied volatility jumping 5%, 10% and 15%.

Understanding the Risk Profile tool—way more powerful than knowing how to crack open a coconut.

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Please note that the examples above do not account for transaction costs or dividends. Transaction costs (commissions and other fees) are important factors and should be considered when evaluating any options trade.  Transactions cost for trades placed online at TD Ameritrade are $6.95 for stock orders, $6.95 for option orders plus a $0.75 fee per contract. Orders placed by other means will have higher transaction costs. Options exercise and assignment fees are $19.99.

Probability analysis results are theoretical in nature, not guaranteed, and do not reflect any degree of certainty of an event occurring.


Market volatility, volume, and system availability may delay account access and trade executions.

Past performance of a security or strategy does not guarantee future results or success.

Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.

Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.

The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

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