buy a spread

Buy a Spread

An options position in which an investor buys an option at a given premium and writes another option with a lower premium and a different strike price. It is important to note that both options expire on the same day. An investor buys a spread to create a position in which he/she will make a profit whether or not the options are exercised. If the investor exercises the option he/she bought, it is because he/she expects to profit on the resale of the underlying asset. If the option with the lower premium is exercised, the investor profits on the sale of the underlying. See also: Exotic option, Spread.

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buy a spread

In options trading, to establish a spread position in which the premium on the option purchased exceeds the premium on the option sold. A typical example would be to buy a call on Microsoft with a $60 strike price for a premium of $300 and to sell a Microsoft call with a $65 strike price for $125 (both expiring on the same date).

Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.