Spread Option

DEFINITION of 'Spread Option'

A type of option that derives its value from the difference between the prices of two or more assets. Spread options can be written on all types of financial products including equities, bonds and currencies. This type of position can be purchased on large exchanges, but is primarily traded in the over-the-counter market.

BREAKING DOWN 'Spread Option'

Some types of commodity spreads enable the trader to gain exposure to the commodity's production process. This is created by purchasing a spread option based on the difference between the inputs and outputs of the process. Common examples of this type of spread are the crack, crush and spark spreads.

RELATED TERMS
  1. Derivative

    A security with a price that is dependent upon or derived from ...
  2. Seagull Option

    A three-legged option strategy, often used in forex trading, ...
  3. Option

    A financial derivative that represents a contract sold by one ...
  4. Crack Spread

    The spread created in commodity markets by purchasing oil futures ...
  5. Vertical Spread

    An options trading strategy with which a trader makes a simultaneous ...
  6. Crush Spread

    A trading strategy used in the soybean futures market. A soybean ...
Related Articles
  1. Options & Futures

    Options Basics Tutorial

    Discover the world of options, from primary concepts to how options work and why you might use them.
  2. Options & Futures

    Out-Of-The-Money Put Time Spreads

    Learn about this low-risk, bearish options strategy used to speculate on major market declines.
  3. Insurance

    Futures Fundamentals

    For those who are new to futures but want a solid understanding of them, this tutorial explains what futures contracts are, how they work and why investors use them.
  4. Options & Futures

    Option Spread Strategies

    Learn why option spreads offer trading opportunities with limited risk and greater versatility.
  5. Term

    The Difference Between a Long and Short Position

    Stocks are owned in a long position and owed in a short position.
  6. Options & Futures

    When Should I Sell A Put Option Vs A Call Option?

    Beginning traders often ask not when they should buy options, but rather, when they should sell them.
  7. Investing Basics

    Explaining Premiums

    Premium has a few different meanings in the financial world.
  8. Options & Futures

    How Do Options Work?

    An option is a contract that sets a price and time for the sale or purchase of a financial asset. It derives its value from the performance of an underlying security.
  9. Options & Futures

    What is a Hedge?

    A hedge investment offsets the risk of adverse price movements in another investment.
  10. Trading Strategies

    What is a Covered Call?

    A covered call is a call an investor sells on a stock he already owns.
RELATED FAQS
  1. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Answer >>
  2. What is after-hours trading? Am I able to trade at this time?

    After-hours trading (AHT) refers to the buying and selling of securities on major exchanges outside of specified regular ... Read Answer >>
  3. How do hedge funds use equity options?

    Learn about two of the most common equity option strategies hedge fund managers use every day to generate above-average returns ... Read Answer >>
  4. Can mutual funds invest in options and futures? (RYMBX, GATEX)

    Learn how mutual funds invest in stock options and futures to benefit from commodities price swings and hedge their portfolio ... Read Answer >>
  5. How does a forward contract differ from a call option? (AAPL)

    Find out more about forward contracts, call options, the mechanics of these financial instruments and the difference between ... Read Answer >>
  6. How can an investor profit from a fall in the utilities sector?

    Learn how an investor can profit from a fall in the utilities sector by employing speculation methods such as short selling ... Read Answer >>
Hot Definitions
  1. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  2. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  3. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  4. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  5. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  6. Economies Of Scale

    Economies of scale is the cost advantage that arises with increased output of a product. Economies of scale arise because ...
Trading Center