What Is a Spread Option?

A spread option is a type of option contract that derives its value from the difference, or spread, between the prices of two or more assets. Spread options differ from various option spread strategies constructed with multiple contracts on different strike prices or differing expirations. Other than the unique type of underlying asset—the spread—these options act similarly to any other type of 澳洲幸运5官方开奖结果体彩网:vanilla option.

Understanding Spread Options

Spread options can be written on all types of financial products including equities, bonds, and currencies. While some types of spread options trade on large exchanges, their primary trading venue is 澳洲幸运5官方开奖结果体彩网:over-the-counter (OTC).

The 澳洲幸运5官方开奖结果体彩网:underlying assets in the above examples are different commodities. However, sprꦉead options may also cover the differences between prices of the same commodity♛ trading at two different locations (location spreads) or of different grades (quality spreads).

Some types of 澳洲幸运5官方开奖结果体彩网:commodity spreads enable the trader to gain exposure to the commodity's production process, specifically the difference between the inputs and outputs. The most notable examples of these processing spreads are the crack, crush, and 澳洲幸运5官方开奖结果体彩网:spark spreads, which measure profits in the oil, soybean, and electricity 🌃markets, respectively.

Likewise, the spread can be between prices of the same commodity, but at two different points in time (澳洲幸运5官方开奖结果体彩网:calendar spreads). A good example would be an option on the spread📖 of a March futures contract and a June futures contract with th🍃e same underlying asset.

Spread Option Examples

In the energy market, the crack spread is the difference between the value of the refined products—heating oil and gasoline—and the price of the input—crude oil. When a trader expects that the crack spread will strengthen, they beli�🗹�eve that the refining margins will grow because crude oil prices are weak and/or demand for the refined products is strong. Rather than buy the refined products and sell crude oil, the trader may simply buy a call option on the crack spread.

Similarly, a trader believes that the relationship between near-month wheat futures and later-dated wheat futures currently trades significantly above its historical range. This could be due to anomalies in the cost of carry, weather patterns, or 澳洲幸运5官方开奖结果体彩网:supply and/or demand. The trader can sell the spread, hoping that its value will sꦍoon return to normal. Or, they can buy a put spread option to accomplish the same goal, but at a much lower initial cost.

Spread Options Strategies

Remember, spread options, which are specific derivative contracts, are not options spreads, which are strategies used in trading options. However, because spread options act like most other 澳洲幸运5官方开奖结果体彩网:vanilla options, a trader can in tu♉rn implement an options spread on spread options—buying and selling different options based on the same underlying spread.

All options give the holder the right, but not the obligation, to buy or sell a specified underlying asset at a specific price or by a specific date. Here, the underlying is the difference in the price of two or more assets. Other than that, all strategies, from 澳洲幸运5官方开奖结果体彩网:bull call spreads to澳洲幸运5官方开奖结果体彩网: iron condors, are theoretically possible.

The caveat is that the market for these exotic options is not as robust as it is for vanilla options. The major exceptions would be crack and crush spread options, which trade on the 澳洲幸运5官方开奖结果体彩网:CME group, so the m💦arkets there are more reliable. Therefore, these options strategies arꦛe more readily available.