A Horizontal Spread, also known as a calendar spread, is an options strategy involving the simultaneous purchase and sale of options contracts on the same underlying asset, with the same strike price, but with different expiration dates. In crypto institutional options trading, this strategy is employed to capitalize on differences in implied volatility between near-term and longer-term options, or to profit from time decay. It is a time-based directional or neutral strategy, rather than a price-based one.
Mechanism
The mechanism of a horizontal spread involves acquiring a longer-dated option (e.g., buying a call with a later expiration) and selling a shorter-dated option (e.g., selling a call with an earlier expiration) at the same strike price. The difference in premiums between these two contracts creates either a net debit or a net credit position. The strategy profits as the shorter-dated option’s time value decays more rapidly than the longer-dated option’s, particularly if the underlying asset’s price remains stable or moves predictably.
Methodology
The strategic methodology for executing a horizontal spread centers on forecasting implied volatility term structures and managing the impact of time decay. Traders often construct these spreads when they anticipate lower volatility in the near term but higher volatility in the long term, or simply to profit from the accelerated decay of the front-month option. Risk management involves carefully selecting strike prices relative to the current underlying price and monitoring volatility changes across expiration cycles to optimize the timing of adjustments or closure.
We use cookies to personalize content and marketing, and to analyze our traffic. This helps us maintain the quality of our free resources. manage your preferences below.
Detailed Cookie Preferences
This helps support our free resources through personalized marketing efforts and promotions.
Analytics cookies help us understand how visitors interact with our website, improving user experience and website performance.
Personalization cookies enable us to customize the content and features of our site based on your interactions, offering a more tailored experience.
