Maximum loss is the worst-case profit/loss on a trade if the underlying moves against you to your break-even point or beyond.
Long Call: Max loss = premium paid ($300 if you paid $3)
Covered Call: Max loss = stock cost - call premium collected
Bull Call Spread: Max loss = width of strikes - premium collected = (10 - 5) = $5 per share = $500
Iron Butterfly: Max loss = width of spread - credit collected
You must know your max loss before entering. It's part of your trading plan.
Credit Spreads: Max loss = width of spreads minus credit collected
Example: Sell $150 put, buy $140 put, collect $2 credit
Debit Spreads: Max loss = debit paid
Example: Buy $155 call, sell $165 call, pay $3
Divide your risk per trade by max loss to determine position size.
If you risk $500 max per trade and max loss is $500, size = 1 contract.
Related: Max Profit, Breakeven, Position Sizing, Risk Management
