Option Spreads

Option Spreads are trading strategies which involve taking positions by buying and selling an equal number of options of the same class, on the same underlying security but with different strike price and expiration date.

The three main classes of option spread are the horizontal spread, vertical spread, and diagonal spread.

Vertical Spreads:

Vertical spreads, or money spreads, are spreads involving option of the same underlying security, same expiration month, but at the different strike price.

Horizontal Spreads or Calendar Spreads:

Horizontal or calendar spreads or time spreads involving option of the same underlying security, same strike prices but with different expiration dates.

Diagonal Spreads:

Diagonal spreads are constructed using options of the same underlying security but different strike prices and expiration dates. They are called diagonal spreads because they are a combination of vertical and horizontal spreads.