During trading in capital markets, there are certain transactional costs and commissions that have to be levied. Sometimes, even when the market is moving in a favourable direction, the transaction costs are so high that any position that the trader establishes in the market is not profitable. An alligator spread refers to a trade in the market that may not be so profitable because of the transactional costs and fees associated with it.
An option is an underlying contract which enables the trader to buy and sell a security. An option spread involves placing a trade in more than two option contracts. This way the risk factor is limited, however, it also limits the profitability. When the costs that are involved in making an option spread are very high then it hampers the possibility of a net profitable outcome. The costs that are involved in such a trade may pertain to broker fees, commissions, clearing fees, and tax implications. Options spreads are beneficial when the risk factor has to be limited but, the transactional costs should be kept in mind.
For example, an investor buys security worth Rs. 90,000 and sells them for Rs. 95,000, however, the costs incurred on the trade is Rs. 5000, hence, no actual profits are made on the trade.
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