The phrase equity spread has several meanings in finance. Most commonly, it refers to a strategy used in futures options trading. It can also be used in spread betting, which is a way of wagering on stock price movements, and in real estate in regards to deals that involve trading properties.
Arguably the most common type of equity spread comes in options trading. This is where investors do not buy and sell a stock itself, but rather the option to buy the stock at a fixed price on a fixed date. If judged correctly, the actual market price of the stock will be higher than the agreed price on this date. This allows the buyer to exercise her option and immediately sell the stock at a profit. Options are considered more valuable to the buyer than futures contracts, which force her to buy the stock at the agreed price on the agreed date, even where doing so is to her detriment.
In this context, an equity spread is a trading strategy. It involves buying multiple options in the same stock, either at differing prices, differing completion dates, or both. The idea is to create a situation where the buyer will make more profit if his predictions are correct, but retain more possibilities of cutting losses by selling on some of the options to another trader if the predictions look to be incorrect.
Another use of the term is an equity spread bet. This is a form of spread betting that involves gambling on a variable figure rather than on a range of fixed outcomes. One common example is betting on the margin by which a team wins in a football game.
The key to spread betting is that the amount paid by the loser of the bet can vary immensely, and he may well lose much more than the money he originally staked. A company taking a spread bet will usually set the starting point differently, depending on whether the gamblers are betting that the measured figure will rise or fall. The difference between the two starting points is the spread, and is somewhat similar to the house advantage in casino games, such as the non-paying "0" in roulette, which throws off the ratio of red to black.
An equity spread bet involves gambling on the performance of an individual stock. The amount a person wins or loses will depend both on how much he stakes and by how much the stock moves. Unlike a sports bet, an equity spread bet may be open-ended, meaning the bettor can choose when to "settle up," and thus wait if he thinks his situation will improve. In most cases though, the other party may be able to insist he pays up when his losses reach a certain point.
Equity spread can also refer to equity in the sense of the proportion of a home's mortgage value that has been paid off. When houses are traded, the respective equity levels in the two homes may affect how much one party pays the other as part of the deal, in addition to exchanging the properties. The disparity between the equity levels is the spread.
