How many 400-risk spreads fit a 900 budget before costs?
Reveal the worked answer
Two.
Round down and reserve additional capacity for costs and operational risks.
Core Options · OPT-F03 · Beginner
Defined payoff risk is not margin
Which cash number measures funding and which measures loss?
What you will learn and prerequisites
- Explain the mechanism in the lesson question.
- Reproduce the worked comparison and recognize its failure case.
Read first: Read a contract and its premium
Premium, margin, notional and terminal maximum loss answer different questions. A credit received is not the amount at risk. A margin requirement is not a contractual loss ceiling. Leverage makes this distinction essential.
Label the number before comparing it with an account balance.
Understand the mechanism
A five-point vertical receiving 1.00 credit has a four-point terminal loss under simultaneous settlement, or 400 with a 100 multiplier. It receives only 100 at entry. An uncovered call can have unbounded loss even though its broker margin is finite.
The path matters. A stop is an instruction, not a price guarantee. Early assignment can create shares; a broker can require funds or liquidate under its agreement. A terminal curve neither models every operational event nor excuses ignoring it.
Walk through the process
Choose a fictional or personally appropriate risk budget separately from the instrument. Divide by a relevant loss estimate and round down. Add costs and correlated exposures. Do not size from a premium credit merely because it is cash arriving in the account.
No classroom percentage is universally suitable. The point is consistent arithmetic and an honest description of what the assumed cap does and does not cover.
A worked example
A fictional 900 risk budget can accommodate two spreads with 400 terminal loss each before costs, exposing 800. Three expose 1,200. Sizing from the 100 credit would incorrectly allow nine spreads and 3,600 terminal risk.
A different broker buying-power number does not change that payoff calculation. Conversely, the 400 terminal bound does not eliminate assignment-related funding needs or bad fills.
Defined payoff risk is not margin—worked comparison
Vertical: Example value
Horizontal: Illustrative observation
1. Fictional example
Read the graph as a data table
| Illustrative observation | Fictional example |
|---|---|
| 1 | 400 |
| 2 | 800 |
| 3 | 1,200 |
| 4 | 1,600 |
| 5 | 2,000 |
What would invalidate the reading?
Using the credit as the risk denominator turns an apparently small position into several times the intended exposure. Assuming the original margin deposit is the most that can be lost is another dangerous error.
Check your understanding
Try the question before revealing its answer. These are reading checks, not trading certification or a site completion record.
What is the critical failure to avoid?
Reveal the worked answer
Using the credit as the risk denominator turns an apparently small position into several times the intended exposure. Assuming the original margin deposit is the most that can be lost is another dangerous error.
Explain this risk before treating the example as a decision rule. A correct calculation does not guarantee a favorable market outcome.
Return to the question: Which cash number measures funding and which measures loss? State the observed facts, the assumptions and the failure condition separately.
Sources, assumptions and downloadable script
External references support definitions and conventions. Worked scenarios and prose are original. No current quotes or dealer inventory are claimed.
Read this lesson as Markdown · Download its JavaScript content module