Finance: What is Alligator Spread?

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.

College and CareerPersonal Finance
CoursesFinance Concepts
FinanceFinance Definitions
Financial Responsibility
Personal Finance
Finance and EconomicsTerms and Concepts
LanguageEnglish Language
Life SkillsFinance Definitions
Personal Finance
SubjectsFinance and Economics
Terms and ConceptsDerivatives
Investing
Stocks
Tax
Trading

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]