Loading the player...

What is a 'Spread'

A spread is the difference between the bid and the ask price of a security or asset. It can also refer to an options position established by purchasing one option and selling another option of the same class but of a different series.

1. The spread for an asset is influenced by a number of factors:

a) Supply or "float" (the total number of shares outstanding that are available to trade) b) Demand or interest in a stock c) Total trading activity of the stock

2. For a stock option, the spread would be the difference between the strike price and the market value.

BREAKING DOWN 'Spread'

In finance, there are 5 ways the term spread is used.

Bid-Ask Spread

The bid-ask spread is also known as the bid-offer spread and buy-sell. Their equivalents use slashes instead of dashes.

For securities like futures contracts, options, currency pairs, and stocks, the bid-offer spread is the difference between the prices given for an immediate order – the ask – and an immediate sale – the bid.

One of the uses of the bid-ask spread is to measure the liquidity of the market and the size of the transaction cost of the stock.

Spread trade

The spread trade is also called the relative value trade. Spread trades are the act of purchasing one security and selling another related security as a unit. Usually, spread trades are done with options or futures contracts. These trades are executed to produce an overall net trade with a positive value called the spread.

Spreads are priced as a unit or as pairs in future exchanges to ensure the simultaneous buying and selling of a security. Doing so eliminates execution risk where in one part of the pair executes but another part fails.

Yield spread

The yield spread is also called the credit spread. The yield spread shows the difference between the quoted rates of return between two different investment vehicles. These vehicles usually differ regarding credit quality.

Some analysts refer to the yield spread as the “yield spread of X over Y”. This is usually the yearly percentage return on investment of one financial instrument minus the annual percentage return on investment of another.

Option-adjusted spread

To discount a security’s price and match it to the current market price, the yield spread must be added to a benchmark yield curve. This adjusted price is called option-adjusted spread. This is usually used for mortgage-backed securities (MBS), bonds, interest rate derivatives, and options.

For securities with cash flows that are separate from future interest rate movements, the option-adjusted spread becomes the same as the Z-spread.

Z-spread

The Z-spread is also called the Z SPRD, yield curve spread, and zero-volatility spread. The Z-spread is used for mortgage-backed securities. It is the spread that results from zero-coupon Treasury yield curves which are needed for discounting pre-determined cash flow schedule to reach its current market price. This kind of spread is also used in credit default swaps (CDS) to measure credit spread.

RELATED TERMS
  1. Ask

    The ask is the price a seller is willing to accept for a security. ...
  2. Spread Indicator

    The difference between the bid and ask price is known as the ...
  3. Nominal Yield Spread

    The nominal yield spread is the difference between a Treasury ...
  4. Buy A Spread

    Buying a spread is an options strategy involving buying and selling ...
  5. Reduced Spread

    A reduced spread is a lessening of the difference between the ...
  6. Bid-Ask Spread

    A bid-ask spread is the amount by which the ask price exceeds ...
Related Articles
  1. Investing

    How To Calculate The Bid-Ask Spread

    It's very important for every investor to learn how to calculate the bid-ask spread and factor this figure when making investment decisions.
  2. Trading

    Trading Calendar Spreads in Grain Markets

    Futures investors flock to spreads because they hold true to fundamental market factors.
  3. Trading

    Option Spread Strategies

    Learn why option spreads offer trading opportunities with limited risk and greater versatility.
  4. Trading

    Which Vertical Option Spread Should You Use?

    Knowing which option spread strategy to use in different market conditions can significantly improve your odds of success in options trading.
  5. Trading

    What is a Bull Call Spread?

    A bull call spread is an option strategy that involves the purchase of a call option and the simultaneous sale of another option.
  6. Investing

    Getting Market Leverage: CFD versus Spread Betting

    Compare and contrast: CFD versus Spread Betting investment products, which offer significant market exposure with a small initial deposit.
RELATED FAQS
  1. What is the difference between an option-adjusted spread and a Z-spread in reference ...

    Learn about the difference between the Z-spread and option-adjusted spread valuations of future cash flows for bonds, and ... Read Answer >>
  2. What number of shares determines adequate liquidity for a stock?

    Learn how the liquidity of a company's shares is generally affected by bid-ask spread and trading volume of shares bought ... Read Answer >>
  3. When is a buy limit order executed?

    Understand how buy limit orders work, and factors such as the bid-ask spread and market volatility that traders must consider ... Read Answer >>
  4. What do the bid and ask prices represent on a stock quote?

    Learn what the bid and ask prices mean in a stock quote. Find out what represents supply and demand in the stock market and ... Read Answer >>
Trading Center