Limited Risk Reward

Limited Risk Reward – refers to an option trade, usually an option spread, that has a defined amount of money it can lose (the “risk”) or make (the “reward”). Sometimes an option spread is adjusted after a market move by adding extra option legs to reduce or totally remove any remaining risk. Limited risk reward option spreads define their risk on order entry. Traders sometimes refer to them as “risk 1 to make X”, for example a “risk 1 to make 2″ would have a maximum risk of $100 to make a maximum profit of $200. Classic examples of limited risk reward trades are the iron condor or short call spread.

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