Horizontal or Time Spreads Option Strategy

A time spread is the purchase of one or more calls (puts) and sale of one or more calls (puts) of the same strike but different expiration. Time spreads are also called horizontal or calendar spreads. The purchase of the June 100 call for $5 and sale of the March 100 call for $3 is an example of buying a call time spread for a $2 debit. The purchase of a June 100 put and sale of the March 100 put is an example of buying the put time spread.

The most that can be made occurs when the March 100 call or put expires worthless, and the future is at 100 so the June call or put still has value. Although not always the case, usually the most that can be lost is the purchase price of the spread, which in this example is $2. The profitability of time spreads is highly dependent on the implied volatilities of the 2 options and the spread relationship between the 2 months.

In fact, it is possible to lose money on buying a time spread, even if the future is at the strike at expiration, if the call or put is cheaper than the price paid for the spread. For example, the June 100 call may be trading at $1 with the June future trading at 100 when the March 100 call expires worthless. Since $2 was paid for the spread, a net loss of $1 is incurred in this case. However, if the June 100 call were trading anywhere above $2 and the March 100 call expired worthless, a profit would be made. Assuming the future is at 100, the pricing of the June 100 call will be highly dependent on the volatility and time to expiration of the option.

The sale of the December 100 put or call and purchase of the September 100 put or call is an example of selling the time spread. In this scenario the investor expects the market to move either higher or lower than the 100 level.