- 7 - hedged position composed of two substantially offsetting positions --for example, the sale of a contract for a put option together with the purchase of a contract for a put option--called a "put spread". Each of the offsetting positions is called a "leg" of the spread. In an open position, price changes in the underlying asset directly affect the value of a futures contract. In the case of a spread, the holder is both a purchaser and a seller of the same asset. Accordingly, when there is a change in the market price of the underlying asset, the price of each leg changes; one leg appreciates while the other depreciates. The movements in each leg do not necessarily equal those in the other, and the price differential between them could change. A gain or loss will be incurred if the price differential widens or narrows; there will be no gain or loss if the spread remains constant. The profit or loss potential of a spread is measured by the increase or decrease in the price differential between the legs. Owning a spread involves less risk than owning an open position because the spread is less volatile than the price of either leg. Therefore, the profit potential of a spread is less than that of an open position. Initial positions in the Merit T-bill option market took the form of "combination spreads". A combination spread involves acquiring a put spread and a call spread at the same time. Each put spread and call spread consists of two options--one bought and one sold--on the same underlying T-bill. A combination spreadPage: 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