11.45Limited-risk vs potentially unlimited-risk positions
1What is it?
A clear list of which F&O positions have a known maximum loss and which do not.
2Why does it exist?
Beginners often sell options because "it wins most of the time", without realising one bad day can wipe out months of gains or more.
3Diagram
| Position | Max loss |
|---|---|
| Long call / long put | Limited (premium) |
| Bull call / bear put spread | Limited (net debit) |
| Iron condor | Limited (width − credit) |
| Long straddle / strangle | Limited (premiums) |
| Protective put | Limited |
| Short call (naked) | Unlimited |
| Short put (naked) | Very large (to strike − premium) |
| Short straddle / short strangle | Unlimited |
| Long or short futures | Unlimited in practice |
4Quick revision
- Buying options and spreads = limited risk.
- Naked selling and futures = unlimited/very large risk.
5Knowledge check
Q1. Is a short strangle limited risk?Show answer
No, unlimited.
Q2. How do you convert a short call into limited risk?Show answer
Buy a higher-strike call (making a spread).
Q3. Max loss of a long put?Show answer
The premium.