DEFINITION of Spread
Spread is the difference in price between the buy (offer) and sell (bid) prices quoted for an asset.
WHAT IT IS IN ESSENCE
The purpose of this trade is to net a profit from the difference between the two legs. That is the spread. Futures and options typically form the legs of such trade.
Such trades are executing as a single unit on futures exchanges in order to ensure that the completion of the trade is perfectly synchronized. Also, to eliminate the risk of one leg failing to execute. And to take advantage of the narrowing or widening.
We can recognize three types of this kind of trades: Calendar, intercommodity, an option. Calendar execution is based on the expected market performance of a security at a specific date, versus its performances at another point in time.
Intercommodity reflects the economic relationship between two different but comparable commodities.
An option spread is formed by buying and selling the same stock at different strike points. The option can be complex, with their exotic names adding to the complexity, like the iron butterfly, iron condor, etc.
HOW TO USE
Many brokers or market makers will quote their prices in this form. The price to buy an asset in a spread will always be higher than the price to sell it. It is also a strategy in options trading that involves combining multiple options with similar features. This is known as an option spread.
When trading products with spreads, the aim is for the asset to move in value beyond the price of it. That means buy trades can be sold for a profit, or sell trades bought for a profit.
It is one way in which traders pay to make trades.
Some trades don’t have a spread but are charged on a commission basis, and some have a mixture of the two.
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