Defined risk
A position whose maximum loss is known in advance from its structure, such as a bought option or a vertical spread.
With a bought call or put, the maximum loss is the premium paid. With a debit spread, it is the net debit paid, and with a credit spread it is the width between strikes minus the credit received. Undefined-risk positions, such as a naked short call, have losses that can grow with the move in the underlying.
Defined risk bounds the loss for the whole life of the position, and a gap in the underlying cannot push a spread’s loss past its defined maximum (the net debit, or the width minus the credit). Early assignment of the short leg, such as a short call around an ex-dividend date, pin risk at expiration and execution costs still need attention.
Illustrative example (hypothetical numbers, not a real trade): a trader sells a $50 put and buys a $45 put for a net credit of $1.20. The width is $5.00, so the maximum loss is $5.00 minus $1.20, or $3.80 per share, which is $380 per spread.