Basic Points

• The instantaneous PnL is the real-time profit or loss associated with an options position. 
• On the risk chart for an option, this is the smooth and curved line.
• What instantaneous PnL shows is how much profit or loss would be available if the position was closed immediately.

Advanced: Example and Dynamics

In this example of the risk chart for a credit iron butterfly, the hard lines show intrinsic value, which is either what happens at expiration or if implied volatility (IV) goes near zero. The curved line, however, is the instantaneous PnL. As you can see, these lines can be very different from the jagged forms.

<Credit IB risk chart retrieved from OptionsPlay>

The instantaneous PnL shows what the value of this credit butterfly would be worth if immediately closed—with the updated facts of spot price, IV, and time remaining. 

What should stand out with this butterfly example in particular is how the lofty max profit (seen in the sharp and jagged lines of the intrinsic value graph) is not attainable with the current IV levels and time remaining. The lines are curved because it is the softening of extrinsic value on top of the sharp foundation of intrinsic value, like snow over sharp rocks.

However, if IV were to crush heavily, then that curved line would grow and begin to fit into those sharp and jagged lines. The lesson here is how misleading these risk graphs can be if there is not also a way to see the instantaneous PnL curve.