Financial Terms related to Spread

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SPREAD
Back spread or backspread

• Is a position where you buy more options relative to the number of sold options.
This strategy typically is placed in the expectation of a dramatic move. Compare to
Ratio Spread.

Bear spread

• Is an option strategy which is structured to profit from price declines in the

underlying market. These spreads can be done for credits or debits. They can be
built with calls or puts. When these strategies are done one-for-one, then the
purchase of the higher strike and the sale of the lower strike establishes the bullish
characteristic. Here, the common strategies are vertical, diagonal, and weighted
spreads.

Bid asked spread

• The difference between the bid and asked prices.

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Bull spread

• A spread strategy in which an investor buys an out-of-the-money put option,

financing it by selling an out-of-the money call option on the same underlying.

• Is an option strategy which is structured to profit from price increases in the

underlying market. These spreads can be done for credits or debits. They can be
built with calls or puts. When these strategies are done one-for-one, then the
purchase of the lower strike and the sale of the higher strike establish the bullish
characteristic. Here, the common strategies are vertical, diagonal, and weighted

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spreads.

Butterfly option spread

• Is an options strategy which uses three strike prices for the same instrument and
same expiration date. It can consist of the sale of two at-the-money options (puts or
calls) and the purchase of one (put or call) at a higher strike price and the purchase
of one (put or call) at a lower strike price.

Buy a spread

• Buy a near futures contract and sell a far one.

Calendar spread

• See Horizontal Spread.

Crack spread

• Is the purchase of crude oil against the sale of the refined products. In futures
trading, it is the simultaneous purchase of crude oil futures versus the sale of
heating oil and gasoline futures. The spread differentials reflect the potential refining
margins or profitability. The spread computes the cost of the raw commodity input,
crude oil, and its refined products, gasoline and heating oil. Compare to Reverse
Crack Spread.
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Credit spread

• Is an option position whereby the end result is a credit. For example, the investor
who places a vertical bear call spread receives a credit. Similarly, the trader who
places a vertical bull put spread receives a premium credit.

• Related: Quality spread

Crush spread

• Is the purchase of soybeans against the sale of the processed products. In futures

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trading, it is the simultaneous purchase of soybean futures versus the sale of
soybean oil and soybean meal futures. The spread differentials reflect the potential
processing margins or profitability. Here, the spread implies that the cost of the raw
commodity input, soybeans, is cheap to its processed products. Compare to
Reverse Crush Spread.

Debit spread

• Is an option position whereby the end result is a debit. For example, the investor
who places a vertical bull call spread pays a net premium or is debited. Similarly, a
risk manager who places a vertical bear put spread is charged a net premium or is
debited.

Diagonal spread

• Is the purchase and sale of puts or calls for the same instrument but for different
strike prices and different delivery dates. These strategies can be done for debits or
credits. Also, they are bullish or bearish depending on the relationship of the
purchased to sold strike price. When the lower strike is purchased and the higher
strike is sold then the strategy has a bullish configuration. When the lower strike is
sold and the higher strike is purchased then the strategy has a bearish configuration.

Effective spread

• The gross underwriting spread adjusted for the impact of the announcement of the
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common stock offering on the firm's share price.

Gross spread

• The difference between the price that the issuer receives for its securities and the
price that investors pay for them. This spread equals the selling concession plus the
management and underwriting fees.

• The fraction of the gross proceeds of an underwritten securities offering that is paid
as compensation to the underwriters of the offering.

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Horizontal spread

• Is a spread which is composed of two puts or two calls on the same underlying
instrument. It is called horizontal because both options have the same strike or
exercise price but two different expiration dates. Generally, the trade is placed with
the nearby option sold and the deferred option purchased. This is an attempt to
capitalize on the acceleration in time value decay for the nearby relative to the
deferred contract month.

• The simultaneous purchase and sale of two options that differ only in their exercise
date.

Intermarket sector spread

• The spread between the interest rate offered in two sectors of the bond market for
issues of the same maturity.

Intermarket spread swaps

• An exchange of one bond for another based on the manager's projection of a

realignment of spreads between sectors of the bond market.

Intramarket sector spread

• The spread between two issues of the same maturity within a market sector. For
instance, the difference in interest rates offered for five-year industrial corporate
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bonds and five-year utility corporate bonds.

Market maker spread

• The difference between the price at which a Market Maker is willing to buy a
security and the price at which the firm is willing to sell it. Simply put, the Market
Maker Spread is the difference between the bid and ask for a given security. Since
each Market Maker can either buy or sell a stock at any given time, the spread is
representative of the profit Market Maker makes on each trade.

Maturity spread

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• The spread between any two maturity sectors of the bond market.

Neutral spread

• Is a term used to describe various positions. It can refer to a position that attempts
to capitalize on flat or stable market price conditions, to be relatively immune to
market swings, or to benefit from volatility. In these cases, the spread tries to
minimize the impact of adverse price, duration, or volatility movements.

• Is an option strategy which is nondirectional in terms of price or interest rate

movement. It seeks to profit by collecting time value. One such strategy is the
Calendar or Horizontal Spread.

Option adjusted spread

• Abbreviated OAS. (1) The spread over an issuer's spot rate curve, developed as a
measure of the yield spread that can be used to convert dollar differences between
theoretical value and market price. (2) The cost of the implied call embedded in a
MBS, defined as additional basis-yield spread. When added to the base yield spread
of an MBS without an operative call produces the option-adjusted spread.

Option adjusted spread model

• Is an approach whereby securities are evaluated by considering the implied option

characteristics. Two key variables are interest rate and prepayment rate behavior.
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These models incorporate the average spread of the Mortgage Backed Security or
CMO tranche to the treasury yield curve. The usual reason for differences in
evaluations is due to assumptions and modeling efforts for prepayments.

Quality spread

• Also called credit spread, the spread between Treasury securities and non-
Treasury securities that are identical in all respects except for quality rating. For
instance, the difference between yields on Treasuries and those on single A-rated
industrial bonds.

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Ratio spread

• Is position where you sell more options relative to the number of options
purchased. Compare to Backspread.

Relative yield spread

• The ratio of the yield spread to the yield level.

Sell a spread

• Sell a nearby futures contract and buy a far one.

Spread

• The difference between the price paid for a security by the investment banker and
the sale price.

• (1) Difference between bid and asked prices on a security. (2) Difference between
yields on or prices of two securities of differing sorts or differing maturities. (3) In
underwriting, difference between price realized by the issuer and price paid by the
investor. (4) Difference between two prices or two rates. What a commodities trader
would refer to as the basis.

• In a quote, the difference between the Bid and the Ask prices of a security. The
spread for a company's stock is influenced by a number of factors, including supply
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or float (the total number of shares outstanding available to trade); demand or

interest in a stock; or total trading activity in the stock. (2) An options position
established by purchasing one option and selling another option of the same class,
but of a different series.

• Is the simultaneous purchase and sale of two related instruments. This strategy
tries to transform outright price risk into a basis or relationship risk position. It is also
viewed as the difference between the bid and the offer or the profit margin.

• (1) The gap between bid and ask prices of a stock or other security. (2) The

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simultaneous purchase and sale of separate futures or options contracts for the
same commodity for delivery in different months. Also known as a straddle. (3)
Difference between the price at which an underwriter buys an issue from a firm and
the price at which the underwriter sells it to the public. (4) The price an issuer pays
above a benchmark fixed-income yield to borrow money.

Spread income

• Also called margin income, the difference between income and cost. For a
depository institution, the difference between the assets it invests in (loans and
securities) and the cost of its funds (deposits and other sources).

Spread strategy

• A strategy that involves a position in one or more options so that the cost of buying
an option is funded entirely or in part by selling another option in the same
underlying. Also called spreading.

Spreading

• In the futures market, buying one futures contract and selling a nearby one to profit
from an anticipated narrowing or widening of the spread over time.

Spreadsheet

• A computer program that organizes numerical data into rows and columns on a
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terminal screen, for calculating and making adjustments based on new data.

Ted spread

• Difference between U.S. Treasury bill rate and eurodollar rate; used by some
traders as a measure of investor/trader anxiety.

Time spread

• See Horizontal Spread.

Vertical spread

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• Simultaneous purchase and sale of two options that differ only in their exercise
price. See: horizontal spread.

Weighted spread

• Is a strategy placed with more or multiple options bought or sold relative to the
other leg. See Ratio Spread and Back Spread.

Yield spread strategies

• Strategies that involve positioning a portfolio to capitalize on expected changes in

yield spreads between sectors of the bond market.