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StockCram is not a broker-dealer, investment adviser, or financial institution. All content is for educational and informational purposes only and should not be construed as personalized investment advice. Consult a qualified financial professional before making investment decisions. Past performance does not guarantee future results.Simple Definition
A trade where your maximum possible loss is known upfront.
Why It Matters
Defined risk is why many traders love buying options. When you buy a call for $300, that's your max loss - period. The stock could crash 50% and you lose exactly $300. Compare this to owning shares where a 50% crash on $30,000 in stock means a $15,000 loss.
Key Points
- Buying options = defined risk (max loss is premium paid)
- Selling naked options = undefined risk (potentially unlimited losses)
- Spreads can define risk on both sides of a trade
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When to Use Options
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Related Terms
Common Questions
A trade where your maximum possible loss is known upfront. Defined risk is why many traders love buying options. When you buy a call for $300, that's your max loss - period.
Defined risk is why many traders love buying options. When you buy a call for $300, that's your max loss - period. The stock could crash 50% and you lose exactly $300. Compare this to owning shares where a 50% crash on $30,000 in stock means a $15,000 loss.
Buying options = defined risk (max loss is premium paid)
Selling naked options = undefined risk (potentially unlimited losses)
Spreads can define risk on both sides of a trade