Risk Graph

  

Categories: Charts

You can see it now: the risk graph. There’s the y-axis (vertical), showing potential profits and losses. We’d prefer profits. Then there’s the x-axis (sideways), which shows the price of an underlying security.

Underlying security? Yep. That means we’re dealing with derivative investments...options, in this case. An options contract is basically a bet on what a certain security will do. If the underlying security hits the strike price before the expiration date, both of which were previously agreed upon in the options contract, then the buyer of the option has the right, but not the obligation, to buy (for call options) or sell (for put options) the shares at the strike price.

The risk graph plots out the risk of an options contract for you. You can see visually what you’re getting into as the underlying security goes up or down in price, relative to the strike price (contract price). Potential payoffs and losses are all there, laid out in front of you.

Now...what’s your chosen destiny, young grasshopper/options trader?

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Finance: What are Systematic and Unsyste...14 Views

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finance a la shmoop what are systemic and unsystematic risk systemic risks are

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just endemic to the market want to invest in the stock market and compound [Plate of vegetable appear]

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return your way into great wealth great but then you'll suffer the normal risk

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of the system that risk specifically is this yeah best of times worst of times

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but up over time the market goes up you just have to embrace the notion that [Man hugging a tree]

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there is systemic risk in that in the short run you can buy an S&P 500 index

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fund here then lose like a third or whatever of your money in not too many

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years but if you don't panic and sell just at the wrong time here right out

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the storm and keep going well then you should be just fine by the time you

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arrive here so that's risk that is always in the system equities rise and [Equity in the ocean]

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fall like the tides or something like that but generally they rise and if you

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want to swim in this bathtub well you get used to the turbulence and have an [Girl swimming against the tide]

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airsick bag handy all right that systemic risk or systemic risk

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what's unsystematic risk well it's bad investors or rather bad investing it's

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panicking and selling your stock just when you should be doubling down its

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buying lousy companies thinking that they're cheap today but not realizing [Woman runs away from smelly girl]

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that they will always be cheap because they're lousy or in a lousy industry or

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run by lousy management it's buying into lousy industries that also look cheap

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but are dying hello paper and pulp is yeah anyone really think that's gonna be [Paper printing]

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around in 20 years all right well it's believing the dreamy hopes and prayers

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of future earnings and trusting that there really will be 5 million [Traffic on the highway]

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driverless cars on the road in 3 years you know good luck with that we'd love

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it to be true but ain't gonna be unsystematic risk is also investing in

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bonds for the long-term taking very little risk when taking little risk is

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the opposite of what you should be doing when you're a young investor so yeah

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