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Finance: What is Alligator Spread? 28 Views
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Description:
What is an Alligator Spread? An alligator spread is a type of spread that creates a loss for the investor. This loss is the result of high fees or commissions on the transaction; these fees end up costing the investor more than they actually make on the transaction.
- Social Studies / Finance
- Finance / Financial Responsibility
- College and Career / Personal Finance
- Life Skills / Personal Finance
- Finance / Finance Definitions
- Life Skills / Finance Definitions
- Finance / Personal Finance
- Courses / Finance Concepts
- Subjects / Finance and Economics
- Finance and Economics / Terms and Concepts
- Terms and Concepts / Derivatives
- Terms and Concepts / Investing
- Terms and Concepts / Stocks
- Terms and Concepts / Tax
- Terms and Concepts / Trading
Transcript
- 00:00
finance a la shmoop what is an alligator spread.... no it's not that
- 00:08
an alligator eats the spread from profitable trades to just a break-even [Alligator eats spread]
- 00:14
trade or worse the alligator is essentially the brokers commission or
- 00:20
spread however it gets paid which makes a given trade unprofitable like a trader
- 00:25
bought a stock for $118.23 cents a share thinking she'd sell it the next day for
Full Transcript
- 00:30
$120 even and make a quick buck 77 but then the Commission comes in at a buck
- 00:36
80 making that particular trade unprofitable well in the real world that [Spread or gross gain from trade pie chart]
- 00:41
term applies to the options market place where Commission's or spreads can be
- 00:45
massive as a percentage of the entity being traded that is a bid-ask spread on
- 00:50
a volatile tech stock might be for a stock trading at 40 bucks a share today
- 00:54
for about ten weeks of duration a put on it at $35 might be priced as a massive
- 01:01
$2 a share meaning that in order to make money buying a put option the stock [Put option stock graph]
- 01:06
would have to decline by more than seven dollars in the next ten weeks that is if
- 01:11
an investor wanted to buy the put they'd be charged two bucks and if they wanted [Person takes away 2 bucks]
- 01:16
to sell the put all they could get for it would be like a dollar 20... 80 cent
- 01:21
spread there if you were trading on the puts and the calls got that then think
- 01:25
about the put itself well in order to make money buying a put option the stock
- 01:29
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]
- 01:32
gets pretty brutal, careful for those options so let's say a few weeks go
- 01:36
along and the price of the put that they paid two dollars for now they want to
- 01:42
sell it because the stocks gone down in the right direction well at dollar 20
- 01:47
now all that gets a dollar eighty the spread ate them up like alligator ate em [Alligator lurking]
- 01:51
gobbled up all the profits so yeah when you combine multiple sets of options
- 01:55
like the above one you can imagine the alligator ends up being painted as well
- 01:59
very toothy [Man painting and crocodile appears scaring him away]
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