DEFINITION of 'Frontspread'

A type of options spread in which a trader holds more short positions than long positions. This type of spread has unlimited risk of loss while also limiting profit potential. This type of trade is often implemented by professional traders who believe that the price of an underlying asset will make a calculated move higher or that volatility will decrease.

Also known as a "ratio vertical spread".

BREAKING DOWN 'Frontspread'

An example of a frontspread is known as a "Christmas tree", which is achieved by purchasing one call option and selling two other call options at two higher strike prices. These types of trades have unlimited downside risk due to the extra short call option and should only be attempted by professional traders.

  1. Call

    1. The period of time between the opening and closing of some ...
  2. Strike Price

    The price at which a specific derivative contract can be exercised. ...
  3. Long (or Long Position)

    1. The buying of a security such as a stock, commodity or currency, ...
  4. Vertical Spread

    An options trading strategy with which a trader makes a simultaneous ...
  5. Volatility

    1. A statistical measure of the dispersion of returns for a given ...
  6. Call Option

    An agreement that gives an investor the right (but not the obligation) ...
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