Time spread means selling an option and buying an option with the same strike price and a longer expiration date.
- Since the loss of time value of recent options is faster than that of forward options, the spread widens when the recent options expire and profits are obtained.
- X stock 30 call option expired in Jan which is three months away from expiration is worth $4, and X stock 30 call option expired in April is worth $6 now.
- Buying the January 30 call option and selling the April 30 call option will receive a premium of $2.
- When the January option expires, if the X stock price is still 30, then the X stock 30 call option expired in April will depreciate to $4, and the spread originally worth $2 becomes $4, and investors can profit $2 from this spread.
- When stocks fall sharply or rise, the option spread will narrow and cause losses
- The maximum loss is the amount paid to purchase this spread strategy