-10- commodity in different delivery months. Such a spread consists of two “legs”: One is the purchase of a commodity for delivery at a specific future date, while the other is the simultaneous sale of the same commodity for delivery at a different specified future date. Although there are variations in spreads, all of them have a simultaneous purchase and sale. In the options market, a “spread” (sometimes called a “straddle”) is a position maintaining simultaneously both long and short options of the same type (i.e., puts or calls) or of different types in the same class. A “vertical spread” in the options market consists of purchasing an option at one strike price and simultaneously selling an option at another strike price, where the options are identical in all other respects.3 “Vertical put spreads” are positions in which a trader has both long (purchased) puts and short (sold) puts in the same underlying asset at different strike prices for the same maturity month. The spread is a “credit spread” when the price paid for the long position is less than the price received for the short position so that the trader’s account shows a cash credit. The trader is then considered to have “sold” the spread. A trader is said to have “purchased” the spread (a “debit spread”) when the price paid for the long position is 3 The following is a typical vertical spread: Buy 1 June 90 call Sell 1 June 95 callPage: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Next
Last modified: May 25, 2011