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Definition of Spread strategy

Spread Strategy Image 1

Spread strategy

A strategy that involves a position in one or more options so that the cost of buying an
option is funded entirely or in part by selling another option in the same underlying. Also called spreading.



Related Terms:

Bull spread

A spread strategy in which an investor buys an out-of-the-money put option, financing it by
selling an out-of-the money call option on the same underlying.


Active portfolio strategy

A strategy that uses available information and forecasting techniques to seek a
better performance than a portfolio that is simply diversified broadly. Related: passive portfolio strategy


Barbell strategy

A strategy in which the maturities of the securities included in the portfolio are concentrated
at two extremes.


Bullet strategy

A strategy in which a portfolio is constructed so that the maturities of its securities are highly
concentrated at one point on the yield curve.


Buy-and-hold strategy

A passive investment strategy with no active buying and selling of stocks from the
time the portfolio is created until the end of the investment horizon.



Combination strategy

A strategy in which a put and with the same strike price and expiration are either both
bought or both sold. Related: Straddle


compensation strategy

a foundation for the compensation plan that addresses the role compensation should play in the organization


Spread Strategy Image 2

confrontation strategy

an organizational strategy in which company management decides to confront, rather than avoid, competition; an organizational strategy in which company management still attempts to differentiate company
products through new features or to develop a price
leadership position by dropping prices, even though management
recognizes that competitors will rapidly bring out
similar products and match price changes; an organizational
strategy in which company management identifies
and exploits current opportunities for competitive advantage
in recognition of the fact that those opportunities will
soon be eliminated


cost leadership strategy

a plan to achieve the position in a
competitive environment of being the low cost producer of
a product or provider of a service; it provides one method
of avoiding competition


Covered call writing strategy

A strategy that involves writing a call option on securities that the investor
owns in his or her portfolio. See covered or hedge option strategies.


Credit spread

Related:Quality spread


Dedication strategy

Refers to multi-period cash flow matching.


differentiation strategy

a technique for avoiding competition by distinguishing a product or service from that of competitors through adding sufficient value (including quality and/or features) that customers are willing to pay
a higher price than that charged by competitors


Effective spread

The gross underwriting spread adjusted for the impact of the announcement of the common
stock offering on the firm's share price.


Gross spread

The fraction of the gross proceeds of an underwritten securities offering that is paid as
compensation to the underwriters of the offering.


Horizontal spread

The simultaneous purchase and sale of two options that differ only in their exercise date.


Immunization strategy

A bond portfolio strategy whose goal is to eliminate the portfolio's risk against a
general change in the rate of interest through the use of duration.


Import-substitution development strategy

A development strategy followed by many Latin American
countries and other LDCs that emphasized import substitution - accomplished through protectionism - as the
route to economic growth.



Intermarket spread swaps

An exchange of one bond for another based on the manager's projection of a
realignment of spreads between sectors of the bond market.


Intramarket sector spread

The spread between two issues of the same maturity within a market sector. For
instance, the difference in interest rates offered for five-year industrial corporate bonds and five-year utility
corporate bonds.


Ladder strategy

A bond portfolio strategy in which the portfolio is constructed to have approximately equal
amounts invested in every maturity within a given range.


Maturity spread

The spread between any two maturity sectors of the bond market.


Option-adjusted spread (OAS)

1) The spread over an issuer's spot rate curve, developed as a measure of
the yield spread that can be used to convert dollar differences between theoretical value and market price.
2) The cost of the implied call embedded in a MBS, defined as additional basis-yield spread. When added to the
base yield spread of an MBS without an operative call produces the option-adjusted spread.


Overlay strategy

A strategy of using futures for asset allocation by pension sponsors to avoid disrupting the
activities of money managers.


Passive investment strategy

See: passive management.


Passive portfolio strategy

A strategy that involves minimal expectational input, and instead relies on
diversification to match the performance of some market index. A passive strategy assumes that the
marketplace will reflect all available information in the price paid for securities, and therefore, does not
attempt to find mispriced securities. Related: active portfolio strategy


Protective put buying strategy

A strategy that involves buying a put option on the underlying security that is
held in a portfolio. Related: Hedge option strategies


Quality spread

Also called credit spread, the spread between Treasury securities and non-Treasury securities
that are identical in all respects except for quality rating. For instance, the difference between yields on
Treasuries and those on single A-rated industrial bonds.



Randomized strategy

A strategy of introducing into the decision-making process a random element that is
designed to reduce the information content of the decision-maker's observed choices.


Relative yield spread

The ratio of the yield spread to the yield level.


Spread

1) The gap between bid and ask prices of a stock or other security.
2) The simultaneous purchase and sale of separate futures or options contracts for the same commodity for delivery in different months.
Also known as a straddle.
3) Difference between the price at which an underwriter buys an issue from a firm
and the price at which the underwriter sells it to the public.
4) The price an issuer pays above a benchmark fixed-income yield to borrow money.


Spread

For options, a combination of call or put options on the same stock
with differing exercise prices or maturity dates.


spread

Difference between public offer price and price paid by underwriter.


Spread

The difference between items typically between two rates of interest or currencies.


Spread income

Also called margin income, the difference between income and cost. For a depository
institution, the difference between the assets it invests in (loans and securities) and the cost of its funds
(deposits and other sources).


Spreadsheet

A computer program that organizes numerical data into rows and columns on a terminal screen,
for calculating and making adjustments based on new data.


Stock replacement strategy

A strategy for enhancing a portfolio's return, employed when the futures
contract is expensive based on its theoretical price, involving a swap between the futures, treasury bills
portfolio and a stock portfolio.


strategy

the link between an organization’s goals and objectives
and the activities actually conducted by the organization


Structured portfolio strategy

A strategy in which a portfolio is designed to achieve the performance of some
predetermined liabilities that must be paid out in the future.


TED spread

Difference between U.S. Treasury bill rate and eurodollar rate; used by some traders as a
measure of investor/trader anxiety.


Vertical spread

Simultaneous purchase and sale of two options that differ only in their exercise price. See:
horizontal spread.


Yield spread strategies

Strategies that involve positioning a portfolio to capitalize on expected changes in
yield spreads between sectors of the bond market.


diversification

strategy designed to reduce risk by spreading the portfolio across many investments.


financial leverage

The equity (ownership) capital of a business can serve
as the basis for securing debt capital (borrowing money). In this way, a
business increases the total capital available to invest in its assets and
can make more sales and more profit. The strategy is to earn operating
profit, or earnings before interest and income tax (EBIT), on the capital
supplied from debt that is more than the interest paid on the debt capital.
A financial leverage gain equals the EBIT earned on debt capital
minus the interest on the debt. A financial leverage gain augments earnings
on equity capital. A business must earn a rate of return on its assets
(ROA) that is greater than the interest rate on its debt to make a financial
leverage gain. If the spread between its ROA and interest rate is unfavorable,
a business suffers a financial leverage loss.



 

 

 

 

 

 

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