CAN THE 8TH OR 9TH WONDER OF THE WORLD SINK LIKE A TITANIC ?

Like the 7 wonders of the world are susceptible to destruction due to cyclone , earthquake and other natural disasters or human disasters like World Wars etc. ; similarly our 8th and 9th wonders of the world are also risk prone or susceptible to destruction or losses .

How & When can the risks appear ?

EXAMPLE IN A FOOTBALL MATCH :

We saw an example of a football match in the earlier post , wherein two friends placed bets on probabilities of either team winning a football match .

Now if football match between two teams A and B go on pretty normal and one team wins by a comfortable margin within 90 minutes and the other team hardly gets to dominate any phase of the match ; then one of the friend wins the bet comfortably and the other loses comfortably without too many hairs lost or beard grayed out .

But imagine if the match goes damn bloody close till extra time last few minutes and then tie breaker / sudden death etc. ; then both friends will be really nervous during the entire course of the match glaring at a loss at various times during the match .

Both would lose quite a few hairs and gray out their beard by the end of the match e.g. the match between Germany and Italy in the Euro 2016 quarter-final , which went on and on till sudden death and further .

Football lovers won’t mind watching the highlights surely in https://youtu.be/jtatIHAgWvw .

So in football terms if the match is one-sided ; the risk of placing bets on either sides is far lesser compared to when the match is closely fought OR COMPETITIVE .

Also very importantly , the risk is directly proportional to the length of the football match – the longer the match goes on the riskier it becomes to place a successful bet .

Risk in Options in financial markets : –

Similar to the football match COMPETITIVENESS , we have something called VOLATILITY in financial markets .

If the market is calm and not turbulent or volatile , then the risk of placing bet on either side is far lesser compared to when the market is turbulent or volatile .

Let us take an example in equity markets and try to understand via a simple example .

Again assume 2 friends A & B have placed their trades on stock X .

Stock X is trading at Rs 800 at present on the 5th of the month .

Friend A expects that stock X would rise in price and reach near 900 by end of the month .
Friend B expects that stock price would rise but surely will not reach 900 by end of the month .

So friend A has bought the option strike price 900 and friend B has sold the option strike price 900 . They bought and sold these options respectively at the beginning of the month say 5th .

Now during the course of the month the stock price behaves very turbulently and goes down to 700 around the middle of the month and then dashes towards 1000 but misses it by whisker and again comes down to finally close around 850 around the end of the month 30th .

Under these circumstances both friend A and B would have had enough tension/scare to lose money and few grey hairs/beards etc as well 🙂 .

Even though as per the end of the month price both A and B would have been successful in their expectations of the closing price and both made money , but during the course of the month both stared at decent losses .

And like in the football match example , the longer the time period to expiry the larger is the risk .

So imagine if the friends have placed their trades for contracts expiring in the 15th of the month , they would have had to suffer less tension/scare/risk because the price volatility would not have been so huge in the smaller duration( between 5th to 15th ) as it was between the larger time frame ( from 5th to 30th ) .

In the next post , we will learn a bit about how can we protect the Titanic from sinking or how we can prevent our losses .

You can view books on ‘Options Trading ‘ from Amazon from the right pane of the blog to understand more in details on the risks . Click on ‘ Short-selling/Options Trading Books’ link and you will be directed to Amazon . You can change the category therein and order some of your favorite products from other categories also like electronics, apparels etc.