Frontspread

Unless we have received some serious training, we should probably stay away from swallowing flaming swords. Likewise, unless we really, really know what we’re doing, we should probably avoid personally getting into frontspreads.

A frontspread is when we have more short positions (securities we sell but are looking to repurchase later at a lower price) than long positions (securities we buy in hopes the value will go up). This is a super-risky strategy, because our potential for loss is literally infinite: if the value of those securities goes down, we’re not going to make any money. At all. Add to this that our profit potential is limited by our strike price, and we could be in for a really painful financial experience.

So why on earth would anyone, even an experienced broker, take on a frontspread? Well, if they think that a security is going to become a lot less volatile, or if they think that the stock price will rise just enough to net them some dough but not so high that they get burned, they might decide the risk is worth it.

If frontspreads seem like our kind of party, we can always look into investment firms that handle those types of option spreads. But, like swallowing flaming swords, it’s something that is probably best left to the professionals.