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Definition
The term alligator spread is used to describe a combination of puts and calls that are not profitable due to relatively high commissions. Alligator spread refers to the investor's position being "eaten alive" by the commissions.
Explanation
An alligator spread is said to exist when an investor's profits are eaten away by large commissions. This effect is not the result of market inefficiencies; rather it is a direct result of a broker's commission schedule. The term is oftentimes used when describing the options market, and can occur even if the markets move in a direction favorable to the investor's position.
While most alligator spreads seem to occur in an unsystematic fashion; it is possible that a broker intentionally arranges a combination of puts and calls that result in a loss-creating spread. For example, an investor's potential profit on a put and call option paring might be $1,000, but the commissions on the necessary transactions might be $1,200. A thorough understanding of the broker's commission schedule will help investors to avoid finding themselves in this situation.
Related Terms
- The term National Best Offer refers to the lowest available ask price, which is a consolidated value from all of the national stock exchanges. The National Best Offer is the lowest price sellers are willing to accept for a security such as a stock.
Moneyzine EditorSeptember 20th, 2023 - The term National Best Bid refers to the highest available bid price, which is a consolidated value from all of the national stock exchanges. The National Best Bid is the maximum price buyers are willing to pay for a security such as a stock.Moneyzine EditorSeptember 20th, 2023
The term market order refers to instructions sent to a broker to buy or sell a security immediately at the best available price. Since there are no restrictions on the selling or purchase price of the security, a market order is oftentimes immediately executed.Moneyzine EditorNovember 6th, 2024
The term limit order refers to instructions sent to a broker to buy or sell securities at a specific price or better. Since a limit order is not a market order, there is no guarantee the transaction will occur.Moneyzine EditorNovember 6th, 2024
The term day order refers to broker instructions to buy or sell a security that automatically expires at the end of the trading day if not executed. Unless specified by the investor, the default orders to buy and sell stocks at most brokerage houses are day orders.Moneyzine EditorNovember 6th, 2024
The term Market-on-Close refers to broker instructions to buy or sell securities at their market price and at the end of the trading day. Unless trading is halted on a security, a Market-on-Close order will be executed at the very end of the trading day.Moneyzine EditorJanuary 24th, 2024
The term Market-on-Open refers to broker instructions to buy or sell securities at their market price and at the beginning of the trading day. Unless trading is halted on a security, a Market-on-Open order will be executed once trading starts for the day.Moneyzine EditorNovember 6th, 2024
The term At-the-Close refers to broker instructions to buy or sell securities at the very end of the trading day. If an At-the-Close order cannot be executed in the final minutes of trading, then it will be canceled.Moneyzine EditorJanuary 8th, 2024- The term Time-in-Force refers to broker instructions that indicate how long an order will remain active before it expires or is executed. Time-in-Force orders provide investors with a mechanism to control the duration parameter for a trade.Moneyzine EditorNovember 6th, 2024
- The term trailing stop order refers to broker instructions that provide the investor with more flexibility than a fixed stop loss order. The stop loss price for a trailing stop order will track the upward movement of a security; remaining a specified percentage below its market price.Moneyzine EditorSeptember 21st, 2023
- The term short position refers to the practice of selling a security with the expectation that its value will decrease over time. Short positions apply to stocks, commodities, currency as well as options.Moneyzine EditorNovember 6th, 2024
- The term primary peg order refers to those that follow the best bid, when buying a security, and the best offer, when selling a security. Primary peg orders allow traders to get the best possible price as a security moves within certain boundaries.Moneyzine EditorSeptember 21st, 2023
The term market peg order refers to those that follow the best bid, when selling a security, and the best offer, when buying a security. Market peg orders follow the opposite side of the market than primary peg orders.Moneyzine EditorFebruary 8th, 2024
The term long position refers to the practice of buying a security with the expectation that its value will increase over time. Long positions apply to stocks, commodities, currency as well as options.Moneyzine EditorNovember 6th, 2024
