Horizontal Spread Options Strategy 2025: Pricing, Examples & How It Works

What Is a Horizontal Spread in 2024?

A horizontal spread, often called a calendar spread, is a sophisticated trading approach involving simultaneous long and short positions on derivatives with the same underlying asset and strike price but different expiration dates. This strategy is popular among options and futures traders aiming to capitalize on volatility changes and time decay.

Key Highlights

• Combines long and short derivative positions on identical strike prices but staggered expirations.
• Helps traders reduce time decay impact while targeting volatility-driven profits.
• Widely used in both options and futures markets to create leveraged positions with controlled risk.
• Enables strategic plays on short-term price movements and volatility fluctuations.

How Does a Horizontal Spread Work?

The essence of a horizontal spread lies in exploiting the price difference caused by varying expiration dates of two similar contracts. Traders buy a contract with a longer expiration and sell one with a nearer expiration, both sharing the same strike price and underlying asset. This creates a price differential attributed to time value, which is a critical factor in options pricing.

In the options market, this approach neutralizes time decay costs by balancing the long and short positions, allowing traders to benefit primarily from volatility changes. In futures markets, where time value is less explicit, the spread reflects market expectations of price changes between contract expirations.

This strategy is especially effective when implied volatility is expected to increase, as longer-term options are more sensitive to volatility shifts (higher vega). Conversely, reversing the positions (selling longer expiration and buying nearer expiration) forms a short horizontal spread, which profits from decreasing volatility.

Important Considerations

While implied volatility impacts the pricing of both contracts, discrepancies in volatility levels between the two expiration dates can affect spread performance. Nonetheless, the horizontal spread typically behaves predictably, offering traders a balanced risk-reward profile.

2024 Example: Horizontal Spread on Exxon Mobil (XOM)

Assuming Exxon Mobil stock trades at $89.05 in early 2024:

• Sell February 95 call option for $0.97 (equivalent to $97 per contract).
• Buy March 95 call option for $2.22 (equivalent to $222 per contract).

The net debit to enter this spread is $1.25 ($125 per contract), representing the cost after receiving $0.97 for the sold call and paying $2.22 for the bought call.

This debit spread caps the maximum loss at the initial investment. The trader aims for the stock price to rise moderately, ideally closing just below $95 at February expiration. This scenario allows the February option to expire worthless while retaining value in the longer-dated March option, maximizing profit potential.

Compared to outright purchasing the March call for $222, the horizontal spread reduces capital outlay and risk, offering a more efficient margin use.

Depending on strike prices and contract choices, horizontal spreads can be tailored for neutral, bullish, or bearish market outlooks.

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