Spread option

In finance, a spread option is a type of option where the payoff is based on the difference in price between two underlying assets. For example, the two assets could be crude oil and heating oil; trading such an option might be of interest to oil refineries, whose profits are a function of the difference between these two prices. Spread options are generally traded over the counter, rather than on exchange.

A 'spread option' is not the same as an 'option spread'. A spread option is a new, relatively rare type of exotic option on two underlyings, while an option spread is a combination trade: the purchase of one (vanilla) option and the sale of another option on the same underlying.

For a spread call, the payoff can be written as ${\displaystyle C=\max(0,S_{1}-S_{2}-K)}$ where S1 and S2 are the prices of the two assets and K is a constant called the strike price. For a spread put it is ${\displaystyle P=\max(0,K-S_{1}+S_{2})}$.

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