An option spread is a strategy used in options trading. It involves buying and selling multiple options on the same underlying asset that are almost identical to each other but with a different strike price or expiry.
There are three main types of options spread used by traders:
- Vertical spreads have identical expiry dates but different strike prices
- Horizontal spreads have identical strike prices but different expiry dates
- Diagonal spreads have different expiry dates and strike prices
Traditional options spread strategies involve buying and selling equal numbers of options contracts. When this isn’t the case, it is called a ratio spread or a backspread.
Different option spread strategies have different uses for an options trader.