Series 3: 5.3.5. Vertical Vs. Horizontal Spreads

5.3.5. Vertical vs. Horizontal Spreads

The spreads we have been discussing so far are known as vertical spreads. Vertical spreads are spreads involving two puts or two calls, each having different strike prices but the same expiration date. They will make or lose money based on the price movement of the underlying instrument above or below the strike price. For this reason, vertical spreads are also known as price spreads, money spreads, and strike spreads.

Another type of spread involves two puts or two calls that have an identical strike price but different expiration dates. For instance, an investor may go long a call that is nine months out and go short a call that is three months out (nearer expiration). These are variously called horizontal spreads, time spreads, or calendar spreads. Horizontal spreads make money based on the changing value of their premiums as they move across time toward their expiration date. Since horizontal spreads have the same strike price, the difference between the price of the underlying product and the strike will always be the same on both sides of the spread. As a result, the two premiums will always have the same intrinsic value. The profitability of this type of spread is determined entirely by the different time values of the options’ premiums.