Spread Definition - Investopedia

Spreads are priced as a unit or as pairs in future exchanges to ensure the simultaneous buying and selling of a security. Doing so eliminates execution risk ... OptionsandDerivatives Strategy&Education WhatIsaSpread? Aspreadcanhaveseveralmeaningsinfinance.Generally,thespreadreferstothedifferencebetweentwoprices,rates,oryields.Inoneofthemostcommondefinitions,thespreadisthegapbetweenthebidandtheaskpricesofasecurityorasset,likeastock,bond,orcommodity.Thisisknownasabid-askspread. KeyTakeaways Infinance,aspreadreferstothedifferencebetweentwoprices,rates,oryieldsOneofthemostcommontypesisthebid-askspread,whichreferstothegapbetweenthebid(frombuyers)andtheask(fromsellers)pricesofasecurityorassetSpreadcanalsorefertothedifferenceinatradingposition–thegapbetweenashort position(thatis,selling)inonefuturescontractorcurrencyandalongposition(thatis,buying)inanother UnderstandingSpread Spreadcanalsorefertothedifferenceinatradingposition–thegapbetweenashort position(thatis,selling)inonefuturescontractorcurrencyandalongposition(thatis,buying)inanother.Thisisofficiallyknownasaspreadtrade. Inunderwriting,thespreadcanmeanthedifferencebetweentheamountpaidtotheissuerofasecurityandthepricepaidbytheinvestorforthatsecurity—thatis,thecostanunderwriterpaystobuyanissue,comparedtothepriceatwhichtheunderwritersellsittothepublic. Inlending,thespreadcanalsorefertothepriceaborrowerpaysaboveabenchmarkyieldtogetaloan.Iftheprimeinterestrateis3%,forexample,andaborrowergetsamortgagecharginga5%rate,thespreadis2%. Thebid-askspreadisalsoknownasthebid-offerspreadandbuy-sell.Thissortofassetspreadisinfluencedbyanumberoffactors: Supplyor"float"(thetotalnumberofsharesoutstandingthatareavailabletotrade)DemandorinterestinastockTotaltradingactivityofthestock Forsecuritieslikefuturescontracts,options,currencypairs,andstocks,thebid-offerspreadisthedifferencebetweenthepricesgivenforanimmediateorder—theask—andanimmediatesale–thebid.Forastockoption,thespreadwouldbethedifferencebetweenthestrikepriceandthemarketvalue. Oneoftheusesofthebid-askspreadistomeasuretheliquidityofthemarketandthesizeofthetransactioncostofthestock.Forexample,onJan.11,2022,thebidpriceforAlphabetInc.,Google'sparentcompany,was$2,790.86andtheaskpricewas$2,795.47.Thespreadis$4.61.ThisindicatesthatAlphabetisahighlyliquidstock,withconsiderabletradingvolume. Thespreadtradeisalsocalledtherelativevaluetrade.Spreadtradesaretheactofpurchasingonesecurityandsellinganotherrelatedsecurityasaunit.Usually,spreadtradesaredonewithoptionsorfuturescontracts.Thesetradesareexecutedtoproduceanoverallnettradewithapositivevaluecalledthespread. Spreadsarepricedasaunitoraspairsinfutureexchangestoensurethesimultaneousbuyingandsellingofasecurity.Doingsoeliminatesexecutionriskwhereinonepartofthepairexecutesbutanotherpartfails. TypesofSpread Theyieldspreadisalsocalledthecreditspread.Theyieldspreadshowsthedifferencebetweenthequotedratesofreturnbetweentwodifferentinvestmentvehicles.Thesevehiclesusuallydifferregardingcreditquality. Someanalystsrefertotheyieldspreadasthe“yieldspreadofXoverY.”Thisisusuallytheyearlypercentagereturnoninvestmentofonefinancialinstrumentminustheannualpercentagereturnoninvestmentofanother. Todiscountasecurity’spriceandmatchittothecurrentmarketprice,theyieldspreadmustbeaddedtoabenchmarkyieldcurve.Thisadjustedpriceiscalledanoption-adjustedspread.Thisisusuallyusedformortgage-backedsecurities(MBS),bonds,interestratederivatives,andoptions.Forsecuritieswithcashflowsthatareseparatefromfutureinterestratemovements,theoption-adjustedspreadbecomesthesameastheZ-spread. TheZ-spreadisalsocalledtheyieldcurvespreadandzero-volatilityspread.TheZ-spreadisusedformortgage-backedsecurities.Itisthespreadthatresultsfromzero-coupontreasuryyieldcurveswhichareneededfordiscountingpre-determinedcashflowscheduletoreachitscurrentmarketprice.Thiskindofspreadisalsousedincreditdefaultswaps(CDS)tomeasurecreditspread. WhatIsaYieldSpread? Ayieldspreadisthedifferencebetweenyieldsondifferingdebtinstrumentsofvaryingmaturities,creditratings,issuer,orrisklevel,calculatedbydeductingtheyieldofoneinstrumentfromtheother.Thisdifferenceismostoftenexpressedinbasispoints(bps)orpercentagepoints.YieldspreadsarecommonlyquotedintermsofoneyieldversusthatofU.S.Treasuries,whereitiscalledthecreditspread.  WhatIsOption-AdjustedSpread(OAS)? Theoption-adjustedspread(OAS)measuresthedifferenceinyieldbetweenabondwithanembeddedoption,suchasanMBS,withtheyieldonTreasuries.Itismoreaccuratethansimplycomparingabond’syieldtomaturitytoabenchmark.Byseparatelyanalyzingthesecurityintoabondandtheembeddedoption,analystscandeterminewhethertheinvestmentisworthwhileatagivenprice. WhatIstheZero-VolatilitySpread(Z-Spread)? Thezero-volatilityspread(Z-spread)istheconstantspreadthatmakesthepriceofasecurityequaltothepresentvalueofitscashflowswhenaddedtotheyieldateachpointonthespotrateTreasurycurvewherecashflowisreceived.Itcantelltheinvestorthebond'scurrentvalueplusitscashflowsatthesepoints.Thespreadisusedbyanalystsandinvestorstodiscoverdiscrepanciesinabond'sprice. ArticleSources Investopediarequireswriterstouseprimarysourcestosupporttheirwork.Theseincludewhitepapers,governmentdata,originalreporting,andinterviewswithindustryexperts.Wealsoreferenceoriginalresearchfromotherreputablepublisherswhereappropriate.Youcanlearnmoreaboutthestandardswefollowinproducingaccurate,unbiasedcontentinour editorialpolicy. Yahoo!Finance."AlphabetInc.(GOOGL)."AccessedJan.11,2022. CompareAccounts AdvertiserDisclosure × TheoffersthatappearinthistablearefrompartnershipsfromwhichInvestopediareceivescompensation.Thiscompensationmayimpacthowandwherelistingsappear.Investopediadoesnotincludealloffersavailableinthemarketplace. Provider Name Description RelatedTerms WhatIsaQuotation? Quotationisacommontermthatreferstothehighestbidpriceforasecurityorcommodityandthelowestaskpriceavailableforthesameasset. more CreditSpreadDefinition Acreditspreadreflectsthedifferenceinyieldbetweenatreasuryandcorporatebondofthesamematurity.Italsoreferstoanoptionsstrategy. more WhatIsaTwo-WayQuote? Atwo-wayquoteindicatesthecurrentbidpriceandcurrentaskpriceofasecurity;itismoreinformativethantheusuallast-tradequote. more WhatIsaBid-AskSpread? Abid-askspreadistheamountbywhichtheaskpriceexceedsthebidpriceforanassetinthemarket. more WhatIsanAlligatorSpread? Analligatorspreadisaninvestmentpositionthatisrenderedunprofitablebecauseoftheonerousfeesandtransactioncostsassociatedwithit. more Cash-and-CarryTradeDefinition Acash-and-carrytradeisanarbitragestrategythatexploitsthemispricingbetweentheunderlyingassetanditscorrespondingderivative. more PartnerLinks RelatedArticles OrderTypes&Processes TheBasicsoftheBid-AskSpread StockTradingStrategy&Education UnderstandingtheNumbersAfterBid/AskPrices AdvancedStrategies&Instruments TheDifferenceBetweenanOption-AdjustedSpread–OASandaZ-Spread FinancialFuturesTrading AnIntroductiontoTradingEurodollarFutures Strategy&Education WhichVerticalOptionSpreadShouldYouUse? AlternativeInvestments Asset-Backed(ABS)vs.Mortgage-BackedSecurities(MBS):What’stheDifference?