Alligator Spread

  

Categories: Tax, Derivatives

This could refer to a gourmet lunch in Louisiana or a centerfold of glossy pages in PlayGator magazine.

In finance, an alligator spread refers to a situation where huge commissions gobble up any profits that could have happened with a trade. Usually, it happens when put options and call options are used to give the investor a chance to buy at a specific price later on. 

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Finance: What is Alligator Spread?28 Views

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finance a la shmoop what is an alligator spread.... no it's not that

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an alligator eats the spread from profitable trades to just a break-even [Alligator eats spread]

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trade or worse the alligator is essentially the brokers commission or

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spread however it gets paid which makes a given trade unprofitable like a trader

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bought a stock for $118.23 cents a share thinking she'd sell it the next day for

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$120 even and make a quick buck 77 but then the Commission comes in at a buck

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80 making that particular trade unprofitable well in the real world that [Spread or gross gain from trade pie chart]

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term applies to the options market place where Commission's or spreads can be

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massive as a percentage of the entity being traded that is a bid-ask spread on

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a volatile tech stock might be for a stock trading at 40 bucks a share today

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for about ten weeks of duration a put on it at $35 might be priced as a massive

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$2 a share meaning that in order to make money buying a put option the stock [Put option stock graph]

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would have to decline by more than seven dollars in the next ten weeks that is if

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an investor wanted to buy the put they'd be charged two bucks and if they wanted [Person takes away 2 bucks]

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to sell the put all they could get for it would be like a dollar 20... 80 cent

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spread there if you were trading on the puts and the calls got that then think

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about the put itself well in order to make money buying a put option the stock

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would have to decline by more than seven dollars in the next ten weeks so yeah it [Decline over more than 7 dollars shown on graph]

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gets pretty brutal, careful for those options so let's say a few weeks go

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along and the price of the put that they paid two dollars for now they want to

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sell it because the stocks gone down in the right direction well at dollar 20

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now all that gets a dollar eighty the spread ate them up like alligator ate em [Alligator lurking]

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gobbled up all the profits so yeah when you combine multiple sets of options

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like the above one you can imagine the alligator ends up being painted as well

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very toothy [Man painting and crocodile appears scaring him away]

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