A Spread is an options trading strategy that involves the simultaneous purchase and sale of options with different strike prices or expiration dates. There are several types of spreads, including debit spreads and credit spreads.
For example, let’s say you believe that the stock of Company XYZ will experience moderate price movement in the near future, but you are unsure about the direction of the movement. You could implement a neutral strategy by executing an options spread, such as a butterfly spread. This strategy involves purchasing two call options with a lower strike price, selling two call options with a higher strike price, and purchasing another call option with an even higher strike price. The result is a net debit to your account, but you have the potential to profit if the stock price remains within a certain range. Options spreads can be used to manage risk, generate income, or speculate on market movements, depending on the specific strategy employed.