  Options Spread are strategies used to trade options in the financial market and consists of the spread positions between the price of options in the same asset class with an equal number of options that have a different strike price and expiration dates. The expiration date and the strike price are different and the difference between the strike prices is the spread position.

1. Horizontal Spread – A horizontal spread is created when an option using the same underlying security with the same and an expiration date that is different.
2. Vertical Spread – A vertical spread has a different strike price; the expiration date and the underlying security remains the same.
3. Diagonal Spread – Diagonal Spread consists of options that have the same underlying security but the expiration date and the strike prices. A diagonal spread is a combination of the above mentioned horizontal and vertical spread.

For eg:

### Examples

A call spread consists of call options of the same underlying security that has a different strike price and expiration date.

The below example of a call credit spread is an options strategy that creates a profit when the value of the underlying security is expected to fall.

##### Example
• Sell call at \$165 with expiration in the next month
• Buy call at \$180 with expiration in the next month

The entry price for the option is \$1 (Sold at \$165 for \$2 and bought at \$180 for \$1)

The maximum potential profit for this options deal is:

• = \$1 x 100
• = \$100

The call spread in this scenario is 15

Hence, the maximum potential loss is:

= (Call Spread – Entry price collected) x No of shares

• = (\$15-\$1) x 100
• = \$14 x 100
• =\$1,400

Put spread consists of of the same underlying security that has a different strike price and expiration date.

The below example of a put credit spread is an options strategy that creates a profit when the value of the underlying security is expected to rise.

##### Example

The initial price of stock while entering a put credit spread is \$330. Each contract consists of 100 shares. The components of the put credit spread are:

• Sell put at \$315 with expiration in the next month.
• Buy put at \$310 with expiration in the next month.

The entry price for the option is \$1.15 (Sold at \$315 for \$5.60 and bought at \$310 for \$4.45)

The maximum potential profit for this options deal is:

• = \$1.15 x 100
• = \$115

The put spread in this scenario is 5

Hence, the maximum potential loss is:

= (Put Spread – Entry price collected) x No of shares

• = (\$5-\$1.15) x 100
• = \$3.85 x 100
• =\$385

### Important Points

• Debit and credit spreads create a profit for the investor if the premium of the option that is sold is higher than the premium of the option that is bought. For such a transaction, the investor receives a credit while entering the spread. Whereas if this were to be the opposite, the investor would be debited while entering the spread.
• When the spread is entered on debit, it is called the debit spread, whereas the spread entered in credit is called a credit spread.
• Spread combinations are complex options strategies that are devised using a combination of different strategies that are aimed at reducing the while trying to earn the profit.
• Box spread consists of a bear put spread and refers to a trading strategy where the trader speculates a limited price appraisal of the stock. Here, the trader bets on the same stock via two call options for the upper and lower strike price range.” url=”https://www.wallstreetmojo.com/bull-call-spread/”][/wsm-tooltip]. In such trade, the risk involved is neutral, and hence the investor can enter a position while negating the risk altogether. In such a strategy, only the premium paid will be the maximum loss that the investor has to bear.

To exemplify,

• Long call – Oct 2019 – Strike 60
• Short put – Oct 2019 – Strike 60
• Short call – Oct 2019 – Strike 70
• Long put – Oct 2019 – Strike 70

• It helps investors to hedge their position and limit the amount of risk exposure.
• It allows investors to invest in while trading on the spread position.
• The probability of earning a profit using option spread is high while limiting the exposure to the risk in the investment.