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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.

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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

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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