From this post I introduce you all to the magical world of 'options'. I would try to limit the use of mathematics because frankly to be a successful options trader intutive understanding of options is what is needed rather than complex pricing formulas.
So what's essentially an option, well an option is essentially a bet. Let's say two people A & B while watching a football match of Italy vs France enter into a bet that if Italy beats France A pays B 1000 rupees else B pays A 1000 rupees. This if I translate it into options would actually constitue into an options trading strategy which I would address sometime later. For now to explain the most basic structure of option let's just extend our example a little bit----------
A fine evening in India in a B school campus to students (A & B) were worried about the derivatives exam tommorrow. To relieve the stress they start watching a friendly match between Italy and France. The match was turning out to be a big dissapointment 30 minutes gone and still no goals!! To heat things up they enter into a bet. A tells B that he pays him 500 rupees upfront. Now if France beats Italy he should forget his money and go back to his books, however if Italy beats france then A would pay B an amount equivalent to 250*(goal difference by which Italy beats France). This is what we know as a 'call option on the victory of Italy'.
B buys from A a call option on the victory of Italy. The payment he gives to A upfront is called the premium (the price of this option). A is known as the option writer, his maximum profit would be 500 rupees in the scenario where France beats Italy. However his loss potential is infinite and will start loosing if Italy beats France by a margin of more than 2 goals.
The same option can be termed as a 'put option on the defeat of France'. So basically the call and put options are the same thing, its just a function of your position.
In trading buying call is part of the bullish strategy --- You are bullish on Italy. While buying put is part of the bearish strategy --- You are bearish on France.
The rest of the article I would continue later..........