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.


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.


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.

  1. Nominal Yield Spread

    The nominal yield spread is the difference between a Treasury ...
  2. Yield Spread

    A yield spread is the difference between yields on differing ...
  3. Vertical Spread

    A vertical spread strategy uses purchases and sales of the same ...
  4. Buy A Spread

    Option strategy that will be profitable if the underlying security ...
  5. Long Leg

    The part of an option spread strategy that involves buying an ...
  6. Bid-Ask Spread

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

    Trading Calendar Spreads in Grain Markets

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

    Vertical Bull and Bear Credit Spreads

    This trading strategy is an excellent limited-risk strategy that can be widely used.
  3. Trading

    Explaining Credit Spread

    A credit spread has two different meanings, one referring to bonds, the other to options.
  4. Investing

    Why Is Spread Betting Illegal In The US?

    Spread betting is a speculative practice that began in the 1940s as a way for gamblers to win money on changes in the line of sporting events. But by 1970, the phenomenon trickled into the financial ...
  5. 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.
  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 are the determinants of a stock's bid-ask spread?

    Stock exchanges are set up to assist brokers and other specialists in coordinating bid and ask prices. The bid price is the ... Read Answer >>
  3. 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 >>
Hot Definitions
  1. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  2. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  3. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  4. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
  5. Return on Investment (ROI)

    Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency ...
  6. Interest Coverage Ratio

    The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a company can pay interest ...
Trading Center