Listen to a Business English Dialogue About Horizontal spread
Ariana: Hi Piper, have you heard about a horizontal spread?
Piper: No, I haven’t. What is it?
Ariana: A horizontal spread is an options trading strategy where an investor simultaneously buys and sells options contracts with the same strike price but different expiration dates.
Piper: Oh, I see. So, it’s a strategy that bets on the price of the underlying asset staying relatively flat over time?
Ariana: Exactly! It can be used when the investor believes the underlying asset’s price will not significantly change before the shorter-term option expires.
Piper: Are there any advantages to using a horizontal spread?
Ariana: Yes, one advantage is that it allows investors to potentially profit from time decay, as the longer-term option typically has a higher premium than the shorter-term option.
Piper: Can you give me an example of how a horizontal spread works?
Ariana: Sure! Let’s say an investor buys a call option with a strike price of $50 expiring in three months and simultaneously sells a call option with the same strike price expiring in one month.
Piper: How do investors manage risk when using a horizontal spread?
Ariana: Investors can manage risk by carefully selecting the strike prices and expiration dates of the options contracts and monitoring the position regularly.
Piper: Thanks for explaining, Ariana. A horizontal spread seems like a useful strategy for capitalizing on stability in asset prices.
Ariana: You’re welcome, Piper. It’s a strategy that can be beneficial in certain market conditions when implemented correctly.