Options Calculator

The Horizontal Spread

Horizontal spreads are closely related to vertical spreads. The technique always involves trading at the same moment options of (nearly) the same type. Nevertheless, while the vertical spreads are trading options with the same expiration date, the horizontal spreads keep the same strikes.

This, on the other hand, means that horizontal spreads have different expiration dates – a reason why they are also referred to as “calendar spreads” or “time spreads”.

There are also different types of horizontal spreads: credit and debit spreads. Debit spreads mean selling short-term and buying long term options, why credit spreads are exactly the opposite. Depending on your bullish/bearish expectations calls or puts are traded.

Debit spreads play on the expectation of increase in implied volatilities. Remember: the bigger the volatility in the underlying the more valuable a long position in its options (call or puts). Therefore you expect a relatively low volatility for your short position and a relatively high volatility at a later date for your long position. The difference between these values is your gain.

Credit spreads are the exact opposite, of course. You expect that the volatility will calm down, making your short options position less valuable to the counter-party.

debit horizontal spread for calls – selling short term and buying long term calls
Usage: near-term neutral to long-term bullish expectations on the underlying
Gain: Unlimited, as long as short term position expires worthless
Risk: Premium paid (debit position)
Break-even: Strike price + premium paid

debit horizontal spread for puts – selling short term and buying long term puts
Usage: near-term neutral to long-term bearish expectations on the underlying
Gain: Unlimited, as long as short term position expires worthless
Risk: Premium paid (debit position)
Break-even: Strike price + premium paid

credit horizontal spread for calls – buying short term and selling long term calls
Usage: near-term bullish to long-term neutral on stock
Gain: First-month unlimited + premium obtained
Risk: Last-month unlimited
Break-even: First-month: strike price – premium obtained.

credit horizontal spread for puts – buying short term and selling long term puts
Usage: near-term bearish to long-term neutral on stock
Gain: strike
Risk: strike
Break-even: strike price – premium obtained