Options mechanics
Defined Risk
A position whose maximum modeled loss is bounded under stated assumptions.
What Defined Risk Means
A defined-risk options position has a finite expiration loss because its legs cap adverse payoff. Assignment and execution can still create interim account demands.
Defined Risk Formula
Credit-spread max loss = strike width − net credit
How to Read the Result
A $5-wide credit spread opened for $1.20 has a maximum expiration loss of $3.80 per share, or $380 per standard contract.
Limitations
- The intended legs must remain intact.
- Costs add to loss.
- Mismatched contracts can create uncovered exposure.
Common Questions
Does defined risk mean low risk?
No. A capped-loss position can still lose most or all capital committed.
Selling options for income
- Wheel vs covered callComparison
- Covered call vs buy & holdComparison
- Managing assignment riskDecision
- Rolling vs closing a positionDecision
- Wheel API endpointAPI