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Defined Risk Trade Mechanics

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Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Join Tom and Tony in today's discussion on defined risk spreads. Covering everything from the entry to management of the trade.

  • ENTRY

    When looking to enter a short defined risk spread, tastytrade tends to default to collecting 1/3rd the width of the strikes. This allows us a higher probability of profit, and the maximum loss is only 2x the credit received. Additionally, having a maximum loss in mind that aligns with the rest of our positions or portfolio allows longer-term probabilities to play out.

  • DEFENSE

    Because we know our maximum loss on entry, tastytrade typically does not defend/roll defined risk spreads, and instead allow the initial POP of the position to work.

  • MANAGEMENT

    Like in undefined risk spreads, we also manage our winners, looking for 25- 50% of maximum profit. This allows us to take winners off the table, re-establish new, high probability positions to boost our number of occurrences and maintain a high probability portfolio.

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