What Is a Spread in Trading?
A spread is the difference between two prices and appears in many forms, from bid-ask to calendar and intercommodity spreads.
What Is a Spread in Trading?
The word spread shows up in trading constantly and does not always mean the same thing. Depending on context, a spread can be a cost you pay, a comparison between two prices, or a complete trading strategy. Understanding the different meanings helps you avoid confusion and make better decisions.
1. Bid-Ask Spread
The most common meaning. The bid-ask spread is the gap between the highest price buyers will pay and the lowest price sellers will accept. A tight spread (e.g., $0.01) signals a liquid market with low cost to trade; a wide spread (e.g., $0.25) signals an illiquid or volatile market with higher cost. This spread is a built-in cost on every trade, set by market makers in exchange for providing liquidity.
2. Spread in Forex Quotes
In forex, "spread" usually refers to the difference between the bid and ask prices of a currency pair, quoted in pips. Typical spreads run 0.4–1.0 pips for EUR/USD, 0.8–1.5 pips for GBP/USD, and 5–20+ pips for exotics. A lower spread means lower trading costs, especially important for high-frequency strategies like scalping.
3. Calendar Spread
A calendar spread involves buying and selling the same asset with different expiration dates. Common in options and futures, it profits from differences in time value or expected price movement between dates. Example: buy a December crude oil futures contract and sell a January contract, betting on how the two months' prices will diverge.
4. Intercommodity Spread
An intercommodity spread trades the price difference between two related but different assets — for example the crack spread (crude oil vs. refined products like gasoline), the crush spread (soybeans vs. soybean meal/oil), or the gold-silver ratio (ounces of silver equal to one ounce of gold). Traders use these to express relative value views rather than outright direction.
5. Option Spreads
Option spreads combine multiple option contracts to limit risk and cost. A bull call spread buys a lower-strike call and sells a higher-strike call; a bear put spread buys a higher-strike put and sells a lower-strike put; an iron condor uses four legs to profit from low volatility. These spreads cap both maximum profit and maximum loss, making risk defined upfront.
Fixed vs Variable Spreads
Brokers typically offer fixed spreads (stay constant even in news, suit traders who want predictable costs, but may be wider on average) or variable spreads (widen and tighten with the market, suit most active traders — usually tighter in calm markets but can blow out during volatility).
Why Spreads Matter
Spreads affect your cost per trade, break-even point, and viable strategies. Every spread is a fee you pay to enter and exit; price must move at least the spread in your favor to break even; and tight-spread instruments favor short-term trading while wide spreads push you toward longer holds. For most beginners, the bid-ask spread is the one that matters daily — the hidden cost on every trade.