Let me start the much awaited options trading tutorial :- )
I know that people have been waiting for this for a very long time, but I’m sure that you all will equally appreciate that creating charts, graphs and other data items on a computer with proper settings take time.

OK, this will be a very fundamental article on options trading to begin with – but don’t think that fundamental things are easy to understand :- )
The simpler a thing is the more difficult it is to accept. We usually end up taking simple things for granted – problem is more severe when it comes to investments and trading.

To begin with, everyone knows that any investment or financial decision or even a bet that you make with your friend has 2 aspects: The Return and The Risk.

Let’s take some examples here:

1. You buy a house:
a. Returns:
i. Real estate price increase
ii. easy & secure accommodation for you and your family
b. Risks:
i. Real estate price decrease
ii. The builder not delivering the amenities he promised. You end up chasing him and later troubling yourself making rounds for legal proceedings, if you file a court case against the builder
iii. new undesired developments in the locality making the area unsafe (like opening of bar/pub) or a slum area nearby
iv. Lack of basic amenities (no arrangements for drinking water, cleaning, etc. by government authority)
v. financial trouble due to interest rate changes if house taken on mortgage or loan

2. You invest in stocks/bonds
a. Returns:
i. Stock/Bond Price Increase and it becoming a multibagger
b. Risks:
i. Stock/Bond Price Decrease
ii. Stock company or Bond issuing organization going bankrupt
iii. Investor forced to book losses to recover money due to urgent money requirements when the stock price is down
iv. Uncertainty in the returns over a period of time

3. You bet with your friend on the outcome of India Pakistan cricket match
a. Returns:
i. You win the bet and the money
b. Risks:
i. You loose the bet and the money

Now, if you look at the above 3 items carefully, you will find that these 3 above mentioned items more or less cover all kinds of financial decisions or investments that an individual makes in his life. (I know that there can be some other things that can be added to the list, but it will be more or less similar. If you believe that there can be some more relevant things or situations that can be added, please post your thoughts in the comments and I’ll modify my article to include your suggestions. Things will work better with active contribution from the readers :-)

Second important thing to note is that both the Return and Risk factors for all of the above mentioned items are not (and cannot be) controlled by an investor. They depend upon several factors – which are out of bounds of any individual investor or any organization. In case of betting on cricket match, you bet on the performance of the players of the 2 teams. While buying a house, hundred more factors play a role for it to be satisfactory for the purpose for which the investment or purchase is made.

Third important point to note is that the risk factors always outnumber the return factors. Hence, in every investment, there is a big risk while a limited return opportunity. (Once again, I know that there can be some other things that can be added to risk and returns list, but it will be more or less similar. If you believe that there can be some more things or situations that can be added, please post your thoughts in the comments and I’ll modify my article to include your suggestions)

That brings us to the first lesson of options trading or derivatives trading tutorial.

The RISK is ALWAYS BIGGER than the RETURNS
Let's head over to the next part Introducing Payoff Functions for Options Trading