Option spreads
When talking about options, "spread" has a different meaning entirely. A spread is a type of options trade that involves purchasing one option and selling another of the same stock. There are a few main types of spreads: vertical spreads involve buying and selling options with different strike prices, calendar spreads (also known as horizontal spreads) involve options with different expiration dates, and diagonal spreads involve both different strike prices and expiration dates.
For example, suppose a certain stock is trading for $50. And, let's say that its $45 call options expiring in a certain month are trading for $6.00 per share, while the $50 call options with the same expiration date are trading for $3.50.
A possible vertical spread might involve buying the $45 calls and selling the $50 calls, at a net cost per share of $2.50. There are three scenarios that could happen. The stock could fall to $45 or less at expiration, and the spread would be worth nothing. The stock could remain at $50 or go higher, and the spread would be worth $5.00 -- the maximum possible profit. Or, the stock could finish somewhere between $45 and $50. This trade would be profitable if the underlying stock's price was $47.50 or higher at the time the options expired.
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