Defined-Risk Options are financial options strategies structured to limit the maximum potential loss to a known amount at the time of trade entry. These strategies contrast with those having theoretically unlimited risk, providing traders with capital protection and clear risk parameters.
Mechanism
These strategies are typically constructed by combining multiple options contracts, such as buying and selling calls or puts with different strike prices or expiration dates, forming spreads. This simultaneous purchase and sale define both the maximum profit potential and the maximum loss, as the gains from one leg offset losses from another beyond a certain point.
Methodology
The methodology behind defined-risk options focuses on strategic risk management and capital efficiency. Traders employ these structures to express directional views or capitalize on volatility expectations while strictly controlling downside exposure. They are favored in institutional crypto options trading for their ability to provide precise risk-reward profiles.
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