Risk/Reward
The ratio comparing the potential profit of a trade to its potential loss.
Explanation
Understanding risk/reward is fundamental to options trading. Credit strategies typically have high probability but unfavorable risk/reward (risking $3 to make $1). Debit strategies have lower probability but favorable risk/reward (risking $1 to make $3). Successful trading requires balancing probability, risk/reward, and position sizing.
Example
A $5-wide iron condor collected for $1.50 has a risk/reward of 1:2.33 (risking $3.50 to make $1.50) but typically wins 60-70% of the time.