Legal Definitions - option spread

An option spread is a term used in securities trading to describe the difference between the option price and the market price of the underlying stock when the option is exercised. This spread can be used to determine the potential profit or loss of an options trade.

• Suppose an investor buys a call option on a stock with a strike price of $50. If the stock price rises to $60, the investor can exercise the option and buy the stock at the strike price of $50, then sell it on the market for $60, making a profit of $10 per share. In this case, the option spread is $10.
• Another example is a put option on a stock with a strike price of $100. If the stock price falls to $80, the investor can exercise the option and sell the stock at the strike price of $100, then buy it back on the market for $80, making a profit of $20 per share. In this case, the option spread is $20.

These examples illustrate how the option spread can be used to calculate potential profits or losses in options trading. By understanding the option spread, investors can make informed decisions about whether to buy or sell options based on their expectations for the underlying stock's price movement.