Horizontal spreads, also known as calendar spreads or time spreads, are options strategies that involve simultaneously buying and selling options of the same type (calls or puts) and strike price, but with different expiration dates. This strategy seeks to profit from the differential decay of option premiums over time, leveraging the concept of time value.
Mechanism
The mechanism typically involves selling a nearer-term option and buying a farther-term option, both at the same strike price. The expectation is that the shorter-dated option’s time value will decay more rapidly than the longer-dated option’s time value. Profit is realized if the underlying asset’s price remains relatively stable around the strike price until the nearer-term option expires worthless, allowing the longer-term option to retain its value.
Methodology
The strategic approach employs horizontal spreads to capitalize on time decay (theta) and potential changes in implied volatility, often in markets expected to remain range-bound or experience moderate price movement. In crypto institutional options trading, these spreads allow for capital-efficient exposure to an asset’s price over different time horizons. Traders use this methodology to generate income or hedge existing positions, optimizing for the differing rates of time decay in Bitcoin or Ethereum options across various expiration cycles.
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