Investing Videos

Calculated Risk Dr Jim Schultz Undefined Risk Options Position Sizing Strangle Short Put Management

Jim Schultz’s Calculated Risk episode tackles the often‑misunderstood world of undefined‑risk option strategies—short puts, strangles, and other naked positions that lack a hard loss cap. He stresses that while the theoretical loss is unlimited, the risk can be actively managed through disciplined sizing, diversification, and pre‑planned trade adjustments. Key insights include a concrete sizing rule of 3‑7% of total buying power per undefined‑risk leg, with brokers typically reserving 15‑20% of the contract’s notional as a practical worst‑case buffer. Schultz also highlights the unfiltered exposure to Greeks—especially Vega and Theta—that undefined‑risk trades provide, offering higher directional and volatility play potential compared with defined‑risk structures. He illustrates his points with recent market turbulence, citing the US‑Iran conflict and sharp swings in equities, and reminds viewers that “respect the tail, and the tail will respect you.” The episode underscores the need for a clear exit map: lock in profits at a set percentage and have contingency rolls ready for losing positions. For premium sellers, the takeaway is clear: undefined risk isn’t a boogeyman, but it demands rigorous position sizing, cross‑asset diversification, and disciplined trade management to survive volatile markets and avoid catastrophic blow‑ups.