Controlled risk refers to trading strategies or instruments where the maximum potential loss is predetermined and limited. This approach helps traders manage their risk exposure by knowing exactly how much they could lose before entering a position. Controlled risk strategies include buying options, using stop-loss orders, and employing defined-risk spreads.

Controlled risk trading is particularly important for retail traders and risk-averse investors who want to participate in markets while limiting downside exposure. These strategies often sacrifice some profit potential in exchange for loss limitation. Popular controlled-risk instruments include binary options, barrier options, and various options spread strategies that cap both gains and losses.

Real-world example: A trader buys a call option for $200 premium, knowing the maximum loss is limited to the premium paid regardless of how far the underlying stock might decline.