Options spread definition (2024)

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 71% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money. 

Professional clients trading spread bets and CFDs can lose more than they deposit.

Options and futures are complex instruments which come with a high risk of losing money rapidly due to leverage. They’re not suitable for most investors. Before you invest, you should consider whether you understand how options and futures work, the risks of trading these instruments and whether you can afford to lose more than your original investment.

Trading stocks and shares ‘on margin’ within a US options and futures account – meaning that you only finance part of the cost of acquiring a position in a security – carries additional risks over buying securities on a fully funded basis and may result in losses exceeding your original investment. Trading on margin will also result in additional costs to you as the investor and any securities purchased using margin may be held as collateral by the lender, restricting both your rights as shareholder, and your ability to use the securities until the margin trade is closed. You should familiarise yourself with these risks before trading on margin.

The value of shares, ETFs and other ETPs bought through a share dealing account, a US options and futures account, a stocks and shares ISA or a SIPP can fall as well as rise, which could mean getting back less than you originally put in. Past performance is no guarantee of future results. Some ETPs carry additional risks depending on how they’re structured, investors should ensure they familiarise themselves with the differences before investing.

Share dealing and IG Smart Portfolio accounts provided by IG Trading and Investments Ltd, CFD accounts and US options and futures accounts are provided by IG Markets Ltd, spread betting provided by IG Index Ltd.   

IG is a trading name of IG Trading and Investments Ltd (a company registered in England and Wales under number 11628764), IG Markets Ltd (a company registered in England and Wales under number 04008957) and IG Index Ltd (a company registered in England and Wales under number 01190902). Registered address at Cannon Bridge House, 25 Dowgate Hill, London EC4R 2YA. IG Markets Ltd (Register number 195355), IG Trading and Investments Ltd (Register Number 944492) and IG Index Ltd (Register number 114059) are authorised and regulated by the Financial Conduct Authority.   

The information on this site isn’t directed at residents of the United States, Belgium or any particular country outside the UK and isn’t intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

Options spread definition (2024)

FAQs

What is the meaning of options spread? ›

An options spread is an options trading strategy in which a trader will buy and sell multiple options of the same type – either call or put – with the same underlying asset. These options are similar, but typically vary in terms of strike price, expiry date, or both.

How do you calculate spread in options? ›

  1. Spread = Difference between the higher and lower strike price.
  2. Bull Call Spread Max loss = Net Debit of the Strategy.
  3. Net Debit = Premium Paid for lower strike – Premium Received for higher strike.
  4. Bull Call Spread Max Profit = Spread – Net Debit.

What is the effective spread of options? ›

The effective spread equals trade price minus midpoint (signed by the direction of the trade), which may be smaller when trades execute at prices inside the quoted bid and ask.

What are the basics of spreads? ›

Spread is the difference between bid and ask price. A trader can buy at ask price and sell on bid price. The minor difference in price is charged by the broker. This spread results in a slightly higher ask price than the bid price, replacing traditional commission charges.

What is an example of a call option spread? ›

You decide to initiate a bull call spread. Options contracts: You buy 1 XYZ October 35 call (long call) at $3.40, paying $340 ($3.40 x 100 shares). At the same time, sell 1 XYZ October 40 call (short call) at $1.40, receiving $140 ($1.40 x 100 shares).

What does spread mean in trading? ›

The Bottom Line. In finance, a spread refers to the difference or gap between two prices, rates, or yields. One common use of "spread" is the bid-ask spread, which is the gap between the bid (from buyers) and the ask (from sellers) prices of a security or asset.

What is spread formula? ›

A spread formula calculates the distribution of an amount among selected child territories. For example, a spread formula takes the variance between the parent territory quota and the sum of the quotas for the child territories, and spreads it to the child territories.

How do you figure out spread? ›

Range. The simplest way to find the spread in a data set is to identify the range, which is the difference between the highest and lowest values in a data set.

How do you calculate the term spread? ›

The near term forward spread is the difference between the expected 3-month interest rate 18-months from now minus the current 3-month yield.

How to do a spread? ›

In the spread, the trader typically pays a debit to buy an option at one expiration and sell one with a shorter expiration at the same strike. The debit calendar spread is designed to be a defined-risk spread.

How do you create an option spread? ›

An options spread basically consists of taking a position on two or more different options contracts that are based on the same underlying security. For example, if you buy contracts on a particular stock and also write contracts on that same stock, then you have essentially created an options spread.

What is the value of a spread option? ›

A spread option is a financial intrument that offers a payoff dependent on the spread of two underlying assets. To price a spread option, one needs to compute the expected spread in a forward risk neutral world with respect to the maturity.

How do you explain the spread? ›

The point spread is the expected final score difference between two teams. It is represented as both a negative and positive number; if the spread is 3 points, you'll see that as both -3 and +3. The team that is the favorite to win gets the minus-number (-3); the underdog gets the plus-number (+3).

What is the formula for spread in trading? ›

How do you calculate the spread in trading? To calculate the spread of a financial instrument, you subtract the bid (buy) price from the ask (sell) price. Check our markets page to view the current spreads for our most popular instruments.

What determines a spread? ›

A stock's spread is the difference between its bid and ask prices. Spreads are determined by market makers in response to how risky it is to create a market for a particular stock. Traders should pay attention to spreads because they offer insight into the market for a stock.

How do option spreads make money? ›

Options Spreads

Often, traders or investors will combine options using a spread strategy, buying one or more options to sell one or more different options. Spreading will offset the premium paid because the sold option premium will net against the options premium purchased.

Why is the spread so high on options? ›

The reason the bid/ask options spread gets wider often has to do with how market makers manage the risks to their respective options positions and trades. Market makers typically don't speculate on where the underlying stock price will go.

What is an example of a spread trade? ›

Types of spread trading

For example, a trader might simultaneously buy and sell shares of the same company listed on both the NSE and BSE. Intracommodity spreads: Traders focus on different contract months of the same commodity futures listed on Indian exchanges.

What does 0 spread imply? ›

A zero spread implies there is no difference in pips between the bid price and ask price; they are exactly the same price when the spread is 0.

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