Risk Graph

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?