Definition
A defined-risk options position is one whose worst-case loss is fully bounded at the moment of trade entry — the trader can calculate the maximum dollar loss before clicking buy, and no subsequent market move can push the loss beyond that number. This stands in contrast to undefined-risk positions (such as naked calls, where losses are theoretically unlimited as the stock rises) where the worst case is open-ended.
Defined risk is created by pairing every "obligation leg" with a corresponding "hedge leg" further out-of-the-money. A short call sold at $105 becomes defined-risk if paired with a long call bought at $110 — the long call caps the loss above $110. This four-letter structural decision (adding a wing) reorganizes the entire risk profile of the trade. For a credit spread, the maximum loss is the width of the strikes minus the net credit received. For a debit spread, it is the net debit paid. In both cases, the answer is calculable on a napkin.
Because the worst case is known, brokers extend much smaller margin requirements for defined-risk positions than for naked short options. This makes defined-risk strategies the standard format for retail options trading — they are accessible at lower account tiers, sized predictably, and survivable even when wrong.