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Spread Trading 

Spread Trading

 

Spread trading is like spread betting in sports: you're betting on whether an outcome goes above or below a given bookmaker's spread. The payoff is based on how accurate the wager is. A spread trading company quotes two prices: the bid price and the offer price. You are "betting" on how much higher than the offer price you think a stock will go, or how much lower than the bid price the stock price will go.

Imagine that for a certain stock, a spread trading company gives you the following quote: a bid price of $100 and an offer price of $105. You think that the stock is going to drop below $100, so you bet $3 for every dollar the stock falls below $100. If on the expiration date the stock ends up at $90, then you've made $3 times $10, or $30 since the stock price fell $10 below their bid price.

Alternately, suppose that at the end of the period the stock ends up at $110. In that case, you would lose $3 times $5, or $15 since the price went $5 above the offer price of $105.

In spread trading, the spread trader takes two positions on the future of a stock, one long, and one short. If the price ends up between the bid price and the offer price, no profit is made (except for the spread trader's commission). There are several sub-types of spread trading. The one just described is a vertical spread. Vertical spreads involve the same security with the same expiration date, but different strike prices.

 

 

Futures Options
Commodity Options
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Spread Trading
 		 

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