What is a "spread"?

What is a "spread"?

Spread has several meanings in finance, but the most general usage is to describe the difference between the bid and the ask prices for a security, where a narrower spread would indicate high trading volume and liquidity. It also might refer to a type of options strategy in which an investor purchases two calls or two puts on the same underlying security but with different expiration dates or strike prices.

The Bid-Ask Spread is the difference between an offer made on a security and the price a seller is willing to accept – the amount by which the ask price exceeds the bid. For example, if the bid price is $50 and the ask price is $51 then the bid-ask spread is $1. The larger the bid-ask spread, the less liquid the market for that particular security, because buyers and sellers are too far apart for trades to occur easily. When trading, investors have to pay attention to the bid-ask spread, because it is ultimately an additional cost to investing in or trading stocks.

In terms of options positions, one can take on a credit spread or a debit spread, in which the investor either receives a credit at the outset of the position or pays a debit to take a position. Options positions attempt to profit from an opinion the investor holds about where the price of an underlying security will move by the expiration date of the contract. An option contract exists between two investors, where one is paid a premium for the right to hold the contract, and one party has the right to buy or sell the underlying security at a specific price, called the strike price, and the other is obligated to buy or sell it at that price when and if the other exercises his or her rights in the contract.

This definition can be confusing because there is also another type of credit spread discussed in finance: the spread between a risk-free rate such as the yield on a 10 Year Treasury, and the average yield on another type of bond or debt instruments, such as 10-year corporate bonds or mortgage-backed securities.

Traders can use artificial intelligence (A.I.) tools to eliminate bias and make rational, optimal investment decisions with options strategy. This includes identifying opportunities like the Bull Call Spread – a vertical spread that buys and sells calls in a way that benefits from upward price movement but limits the risk of the short position. There are myriad ways to use technical analysis in trading, and which indicator or methodology a trader decides to use usually depends on their experience, skillset, and the quality of the tools (A.I.) available to help them identify trade ideas.