5 Basics of Options in 5 Minutes

#4 -- lose the part about "lose $10". You only lose the purchase price; you're follow-on comments try to correct this.

In general, though:
Do The 3 Basics of Options in 3 Minutes:
#1: Options are insurance:
-- a right to buy cheaper (like a sale coupon) on top.
-- a right to sell higher (like accident insurance on your car) on bottom.

#2 The premium you pay for that insurance is primarily affected by
-- the length of time it's good (more time→more $$$)
-- the distance of the insured price to the desired market price
(call insurance↓ with higher price, put insurance↓ with lower price)
-- the expected jitters ("volatility") of the market at that time. (more volatility→more $$$)

#3 Since options buy&sell insurance, then also, options buy&sell risk.
Thus understanding the 4 option risk graphs clarifies all sorts of questions...

iu



((That was fun. :D ))
 
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tommcginnis said:
#4 -- lose the part about "lose $10". You only lose the purchase price; you're follow-on comments try to correct this.

In general, though:
Do The 3 Basics of Options in 3 Minutes:
#1: Options are insurance:
-- a right to buy cheaper (like a sale coupon) on top.
-- a right to sell higher (like accident insurance on your car) on bottom.

#2 The premium you pay for that insurance is primarily affected by
-- the length of time it's good (more time→more $$$)
-- the distance of the insured price to the desired market price
(call insurance↓ with higher price, put insurance↓ with lower price)
-- the expected jitters ("volatility") of the market at that time. (more volatility→more $$$)

#3 Since options buy&sell insurance, then also, options buy&sell risk.
Thus understanding the 4 option risk graphs clarifies all sorts of questions...

iu



((That was fun. :D ))
More...

Tommies was much better.
 
It would be slightly more descriptive and accurate, at least the way options are used in "real life" to say: Selling a Call (Short) = Bearish to Neutral, and Selling a Put (Short) = Bullish to Neutral. At least in my simple little mind. :)
 
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Thank you Tommy, this explanation and graphic are a lot clearer!

Would you be interested in having us include this graphic in our post? Or I can make a modified version that is 'original' if you prefer. I just want to make sure we have the best description possible. And we will credit you too, of course :) (LMK if you have a website or something you want credited more than tommcginnis)
 
Wow -- high compliments, guys. Thank you, truly.

Tyler, the graphic was pulled from a web search -- I just pulled a url from:
https://powerprofittrades.com/wp-content/uploads/2016/07/risk-graph.jpg

And I would tweak/clarify #2, so's the whole thing reads

Do The 3 Basics of Options in 3 Minutes:
#1: Options are insurance:
-- a right to buy cheaper (like a sale coupon) on top.
-- a right to sell higher (like accident insurance on your car) on bottom.

#2 The insurance premium you pay is primarily affected by
-- the length of time it's good (more time→more $$$)
-- the distance of the insured price to the current market price
(call insurance↓ with higher insured price, put insurance↓ with lower insured price)
-- the expected jitters ("volatility") of the market at that time.
(more volatility→more $$$)

#3 Since options buy&sell insurance, then also, options buy&sell risk.
Thus understanding the 4 option risk graphs clarifies all sorts of questions:
No matter how complex or fancy an option trade/strategy might appear,
it only boils down to an application of the 4 option risk graphs below.


iu


(("Phew!" :wtf: I feel much better now.))
 
Last edited:
tommcginnis said:
Wow -- high compliments, guys. Thank you, truly.

Tyler, the graphic was pulled from a web search -- I just pulled a url from:
https://powerprofittrades.com/wp-content/uploads/2016/07/risk-graph.jpg

And I would tweak/clarify #2, so's the whole thing reads

Do The 3 Basics of Options in 3 Minutes:
#1: Options are insurance:
-- a right to buy cheaper (like a sale coupon) on top.
-- a right to sell higher (like accident insurance on your car) on bottom.

#2 The insurance premium you pay is primarily affected by
-- the length of time it's good (more time→more $$$)
-- the distance of the insured price to the current market price
(call insurance↓ with higher insured price, put insurance↓ with lower insured price)
-- the expected jitters ("volatility") of the market at that time.
(more volatility→more $$$)

#3 Since options buy&sell insurance, then also, options buy&sell risk.
Thus understanding the 4 option risk graphs clarifies all sorts of questions:
No matter how complex or fancy an option trade/strategy might appear,
it only boils down to an application of the 4 option risk graphs below.


iu


(("Phew!" :wtf: I feel much better now.))
More...
I am truly impressed.

You must be teaching finance somewhere, to be able to distill into such simple terms. :thumbsup:
 
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