One of the greatest things about being an option trader is the freedom to shape risk however we choose. We can combine options to alter our probability of profit and establish boundaries that fit our risk tolerance. So far, we've covered mostly undefined risk strategies – strategies with no limits to potential loss. As beginners, and traders with limited capital, however, this level of risk may not be appropriate.
In order to reduce our total risk to more comfortable levels, we can combine with our to establish limits at trade entry. This is known as defining risk. Doing so can improve and prevent losses that are too large for our accounts to handle. In this article, I'll introduce you to vertical spreads – a powerful and versatile strategy that allows you to trade the market's most expensive products for as little as a few hundred dollars of maximum risk.