The most important tool for controlling risk while maintaining strategic exposure.
Most new options traders start with long calls or puts.
Some get bolder and begin selling options outright.
But the smartest traders look for risk-defined spreads - structured positions where your maximum loss is capped from the start.
These spreads give you leverage with control, which is the foundation of professional options trading.
What Is a Risk-Defined Spread
A risk-defined spread uses two or more options to create a position where both your maximum profit and maximum loss are known up front.
Common examples:
- Vertical spreads (bull call, bear put, credit spreads)
- Iron condors
- Butterflies and condors
- Calendar spreads (slightly more advanced)
Today, we focus on vertical spreads as the core structure.
Bull Call Spread Example
- Buy a call at Strike A
- Sell a call at Strike B (higher)
- Same expiry
You are bullish, but you define your risk.
- Max loss = premium paid
- Max gain = difference between strikes minus premium
- Theta and Gamma are balanced between the legs
You reduce cost and limit your downside while preserving upside.
Bear Put Spread Example
- Buy a put at Strike A
- Sell a put at Strike B (lower)
- Same expiry
You are bearish, but again, you define your exposure.
- Max loss = net premium paid
- Max gain = difference between strikes minus premium
- Still benefits from a directional move, but with built-in protection
Why Use Risk-Defined Spreads
- Control your exposure
- Trade larger size with less margin
- Reduce Vega and Theta risk
- Avoid liquidation-style losses
- Express directional views more efficiently
These structures also let you build more complex strategies later without taking on unbounded risk.
On Derive
- Build vertical spreads easily using the trade ticket
- Margin and risk are calculated instantly
- Greeks are updated in real time for both legs
- Subaccounts let you isolate risk-defined positions
Risk-defined spreads are capital efficient and clear.
They are ideal for both beginners and professionals.
Your Action Today
- Open the Derive options chain
- Build a sample bull call and bear put spread
- Compare premium, breakeven points, and max loss
- Watch how Greeks change between the legs
- Think about how this structure fits your risk tolerance
Tomorrow, we will look at ratio spreads and how to responsibly introduce asymmetry into your trades.
Coming tomorrow:
Day 25 – Ratio Spreads: Controlled Asymmetry
Hasta manana
Cpt
CptRandlelwa
