The difference between the bid and the asking price of an asset or a security is termed as a spread. There are a number of factors which are responsible for influencing the spread for an asset. The first one is supply or float. It is the total number of outstanding shares which are available for trading. Secondly, interest or demand in a stock. Thirdly, the all total of the stock trading activity. In terms of the stock option, the spread is the difference between the strike price and the market value. With the help of an Orion code, you can use a spread that can make a lot of difference to your investment.
To understand spread better, you must be aware of some of the terms related to it:
- The first term that is often used is the bid-ask spread, which is also known as the bid-offer spread and buy-sell. It is the difference between the prices given for an order which is considered as the ask and an immediate sale which is the bid for securities such as currency pairs, stocks, futures contracts, and options. It can measure the size of the transaction cost of the stock and the liquidity of the market.
- Spread Trade is used to purchase one security and sell another one which is related to security as a unit. Spread trade is also known as the relative value trade. These are also done with futures contracts and options. This helps in producing an overall net trade with a positive value. It ensures the simultaneous buying and selling of a security by pricing the spreads as a unit or as pairs in future exchanges. This can eliminate the execution risk in which one part of the pair gets executed but the other part fails.
- The yield spread, which is also known as the credit spread helps to find the difference between the rates of return among two investment vehicles. Such vehicles differ based on their credit quality. It is the difference between annual percentage return on investment of two different financial instruments.
- An option-adjusted spread is used for discounting a security’s price and matching it to the current market price by adding the yield spread to a benchmark yield curve.
- The Z-spread which is also called the zero-volatility spread is used for mortgage-based securities. This can help in discounting pre-determined cash flow schedule for reaching the current market price.