A Time Spread, also known as a calendar spread or horizontal spread, is an options trading strategy that involves simultaneously buying and selling options of the same type (call or put) and strike price, but with different expiration dates. Its fundamental purpose is to profit from the differential in time decay (Theta) between the near-term and far-term options, typically implemented when anticipating low volatility in the underlying asset.
Mechanism
The operational structure of a time spread involves selling the option with the closer expiration date and buying the option with the later expiration date. The expectation is that the shorter-dated option’s extrinsic value will decay faster than the longer-dated option’s value, allowing the trader to profit from this rate differential. The underlying asset price should remain relatively stable or within a defined range, allowing time decay to work favorably.
Methodology
The strategic approach relies on a prediction of low underlying asset volatility and a stable price, or a gradual drift towards the strike price, enabling the profitable capture of time value erosion. Governing principles include careful selection of strike prices and expiration cycles, constant monitoring of implied volatility skew and term structure, and precise management of gamma and theta exposure. This methodology is particularly relevant in institutional crypto options trading where volatility dynamics can present distinct opportunities for relative value plays.
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