What is a price spread in options trading?

A price spread in options trading specifically refers to a strategy that involves buying and selling options on the same underlying asset with differing strike prices but the same expiration date. This strategy allows traders to take advantage of price differences between the two options to maximize potential profit while minimizing risk.

For example, if a trader believes that a stock will not move significantly beyond a certain price range, they could buy a call option at a lower strike price and simultaneously sell a call option at a higher strike price, thereby creating a price spread. This limits both the risk and the potential reward, as the maximum loss is capped at the premium paid for the bought option minus the premium received from the sold option.

Understanding price spreads is critical for options traders as it allows them to develop various strategies based on market expectations, risk tolerance, and investment goals.