Option Trading Lesson 2.1

What Is a Spread?

One of the uses of the bid-ask spread is to measure the liquidity of the market and the size of the transaction cost of the stock.  (流動性與成交量)

• In finance, a spread refers to the difference between two prices, rates or yields.
• One of the most common types is the bid-ask spread (買賣差價) ,which refers to the gap between the bid (from buyers) and the ask (from sellers) prices of a security or asset
• Spread can also refer to the difference in a trading position – the gap between a short position and a long position.

Spreads are priced as a unit or as pairs in future exchanges to ensure the simultaneous buying and selling of a security. Doing so eliminates execution risk wherein one part of the pair executes but another part fails.

Assume: Stock XYZ current market price is $100, 持有股票= 有貨

Vertical Spread

1. Bull Call Spread (LC 100, SC 110)
2. Bear Put Spread (SP 100, LP 90)

What Is a Box Spread?

A box spread is an options arbitrage strategy that combines buying a bull call spread with a matching bear put spread. In other words, buy an ITM call and put and then sell an OTM call and put.

(SC 105, LC 95, LP 105, SP 95)

Credit spreads vs Debit spreads

Example of Debit spreads

Conversely, a debit spread—most often used by beginners to options strategies—involves buying an option with a higher premium and simultaneously selling an option with a lower premium, where the premium paid for the long option of the spread is more than the premium received from the written option. (LC 105, SC 110)

Unlike a credit spread, a debit spread results in a premium debited, or paid, from the trader's or investor's account when the position is opened. Debit spreads are primarily used to offset the costs associated with owning long options positions. (LP 95, SP 90)

Example of Credit spreads:

A bearish trader (不如直接做LP) expects stock prices to decrease, and, therefore, buys call options (long call) at a certain strike price and sells (short call) the same number of call options within the same class and with the same expiration at a lower strike price.  (LC 100, SC 95)

In contrast, bullish traders (不如直接做LC) expect stock prices to rise, and therefore, buy call options at a certain strike price and sell the same number of call options within the same class and with the same expiration at a higher strike price. (LC 100, SC 105)

Source: Investopedia