Legal Definitions - option spread

The term option spread, in this specific legal context, refers to the financial difference calculated at the moment an option contract is put into effect. It is the gap between the strike price (the predetermined price at which the underlying asset can be bought or sold) and the current market price of that underlying asset at the exact time the option holder chooses to exercise their right. This calculation helps determine the immediate financial outcome of exercising the option.

• Example 1: Exercising a Profitable Call Option

  An investor holds a call option for shares of "Green Energy Solutions Inc." with a strike price of $60 per share, meaning they have the right to buy shares at $60. On the day they decide to exercise this option, the market price of Green Energy Solutions Inc. stock is $68 per share. The option spread in this scenario is the difference between the market price ($68) and the strike price ($60), which is $8. This $8 represents the immediate profit per share the investor gains by buying at the lower strike price and effectively owning stock worth $68.

• Example 2: Exercising a Protective Put Option

  A portfolio manager owns a put option for "Digital Innovations Corp." stock, giving them the right to sell shares at a strike price of $110 per share. When the market experiences a sudden decline, the market price of Digital Innovations Corp. stock drops to $102 per share. The manager decides to exercise their put option to limit losses. The option spread here is the difference between the strike price ($110) and the market price ($102), resulting in an $8 spread. This $8 represents the immediate advantage per share the manager gains by selling at the higher strike price compared to the current market value.

• Example 3: An "Out-of-the-Money" Call Option

  A trader purchased a call option for "Global Logistics Ltd." with a strike price of $45 per share, hoping the stock would increase. However, as the option's expiration date nears, the market price of Global Logistics Ltd. stock is only $42 per share. If the trader were to exercise this option (which would be financially disadvantageous), the option spread would be the difference between the strike price ($45) and the market price ($42), which is $3. In this case, the spread indicates an immediate $3 loss per share if exercised, as the right to buy at $45 is less favorable than buying directly from the market at $42.