Defined-Risk Structures and Strategy Limitations

What this unit covers

Understand why defined-risk structures exist, to cap the worst case, and what every strategy in this module gives up in exchange for that protection.

By the end you will be able to

• Explain how a defined-risk structure caps loss by combining two options.
• Recognize that the mechanism capping loss usually also caps gain, cost, or flexibility.
• Identify what a given structure protects and what it gives up before using it.

How it starts: The Cap You Did Not See

1. You switch to a defined-risk spread because everyone calls it the safer trade.
2. The stock you tracked runs far higher than you had expected that evening.
3. Your account shows a capped gain, so what did that cap decide for you?

Words you will meet

Defined-risk structure

A position built from two or more options so the worst-case loss is fixed in advance.

Spread

Buying one option and selling another to cap both the cost and the possible loss or gain.

Premium

The price paid to buy an option, or received for selling one.

In this module: Practical Option Strategies

1. Payoff Logic
2. Spreads
3. Straddles and Strangles
4. Defined-Risk Structures and Strategy Limitations (this unit)