Defined risk
Definition · Level 2 · Long options & hedges
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A position whose worst-case loss is known and capped at entry — any long option, or a spread whose long option limits the short one (verticals, condors, flies) — unlike short stock or naked short options.
Example
“It’s a capped trade — I can lose the 1.80 and nothing more.”
Where Tradecraft teaches it
Level 2 · Long options & hedges, in the lesson “Buying calls and puts”: Pay a premium for the right to profit from a move — your risk is capped at what you paid.
Related terms
- Long CallPay a premium for the right to buy 100 shares at the strike.
- Long premiumBeing a net buyer of options: you pay up front, time decay works against you, and big moves or rising IV help.
- Long PutPay a premium for the right to sell 100 shares at the strike.
- ArbitrageLocking in a profit, riskless in principle, from a price discrepancy by simultaneously buying the cheap side and selling the rich side of equivalent…
- Borrow feeThe annualized fee a short seller pays to borrow shares (and a lender earns); large on hard-to-borrow names.
- CollarOwn the stock, buy a put below and sell a call above.