Undefined risk
The loss has no known ceiling, as in a naked short call. The odds of winning are high, which is what makes it tempting; the size of the failure is what ruins you.
In the chapter
VIIIRisk
What can go wrong, and by how much
From the same chapter
- Defined riskThe maximum loss is known at entry and cannot grow. Everything you buy is; spreads are too.
- Break-evenThe price at which the position neither wins nor loses at expiry. On a long call it is the strike plus the premium, not the strike.
- Early assignmentBeing assigned before expiration. It only happens American-style and is triggered above all when a dividend is in play.
- Pin riskExpiring with price glued to the strike, not knowing whether you will be assigned. You can wake up on Monday holding a position you did not choose.
- Margin requirementThe money the broker locks up while the position is open. It is not what you can lose: it is what you cannot use.