Horizontal SpreadA horizontal spread happens when you buy an option and sell an option on the same stock with the same strike price, but with different expiration dates. For example say it is February and we find a stock we want to place a horizontal spread on. We buy the March $70 call for $7 and
Sell the February $70 call for $5 Max Profit The most we could make is the combined sum of the options we sold, in this case $5 and what we sold the last month option for. So if we sell this and the stock doesn’t make a big move we might be able to sell the March Call for another $5, or maybe even more. In this case we made a total of $10 but spent $7 to do it. Max Loss The most we could lose is the difference between what we sold the call for and what we bought the later month call for. We would lose money if the stock goes up too fast on the first month and goes above $70. If that happened we would buy the stock at $70 and sell it at $70 but we would be out of the position for a loss of $2. We could also lose money if the stock falls too fast. If the stock falls so far that the March $70 put isn’t worth that much we could also lose money. When to Sell Them You can sell a Horizontal spread when you aren’t expecting the stock to make a big move. If you believe the stock will stay range bound for a while it is a good method to produce a monthly income.
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