Option spreads are very similar to forex market spreads If we talk about the horizontal option spread, then we are talking about the type of strategy. A market tactic that involves purchasing options that are exercised at equal value, with different expiration dates. Since the expiration dates - expiration dates are different, the horizontal spread is often called a calendar spread. It is formed based on contracts - agreements to buy or sell a call option if their price is equal, but the expiration dates of the contracts are different.
When the expiration date is more distant, the exit is a long call. Also, the trader should be aware that most of the time to expiration of the agreement provides a high option price. That is why the formation of a horizontal option spread requires significant investments from the investor on the part of the player.
At the time of creating this strategy, it is acquired by the investor, who by default (automatically) becomes the owner of the long spread (long time). Let us consider in more detail the option spread itself, or rather its variants and capabilities (functions). The main task of an investor when creating an options tactic, first of all, is to buy an option at a lower value, and then sell it at a higher price. As a rule, one of the most profitable decisions is formed in the process of combining a specific number of transactions that relate to one - a fixed asset. And the created agreements can be opened for different periods, at different option prices, and for a variety of expiration dates.
As for the options for trading strategies with options, there are the following: - simple: the tactic is to conduct only one transaction (for example, the purchase or sale of one of the depositor's assets). - combined strategy: parallel (simultaneous) opening of several deals in different directions; -synthetic: the creation of reverse transactions, opposite to each other and different types of options (regarding one asset); - spread: the strategy involves opening the same options on similar instruments, at different prices and expiration dates. If we talk specifically about the horizontal option spread, then when it is created, the player believes that when the term expires, its profitability will increase.
This hypothesis is based on the fact that short-term options will reduce prices at a faster rate than in similar assets, but long-term in terms of implementation. There is also another variant of the horizontal spread, which consists in selling a long-term asset - an instrument at the same selling price.
But such a method should be performed only if it is impossible to implement the original method. If we talk about the essence, then the meaning of the horizontal spread is as follows: rationally and in general it makes sense to apply this option spread in a situation when the premium price of two options includes data from a longer-term asset, or the temporary difference decides: it promotes insurance of probable risks in a short-term transaction. In the course of managing this strategy, a certain economic model is formed - a concept that allows us to calculate the bank's profitability based on the formed value, as well as in the case of lending to its capital.
With the help of an option spread, you can manage not only interest (interest margin), but also manage risks.