The time spread is an approach or strategy to option buying and selling. Within the context of a time spread, the investor will make use of a combination of purchasing and selling put and call options to achieve a desired result. This option strategy will involve options that have the same strike price, but which carry different expiration dates.
Sometimes referred to as a horizontal spread, the main function of the time spread is to allow the investor to continue enjoying the returns on the options involved. A common structure for a time spread is the sale of a put or call option that is nearing the end of its term, while purchasing a similar option that carries the same strike price and is longer or further in term. This approach helps to keep the portfolio balanced as far as the type of options involved, and also allows the investor to continue enjoying similar benefits without having to be unduly concerned about expiration dates.
One of the easiest ways to understand the operating structure of a time spread is to begin with an option that is already in the portfolio. Assuming that the investor has an option that is set to expire in the next thirty days, the broker handling the portfolio may be asked to locate a similar option that carries an expiration date that is three months in the future. If an option that is similar to the currently held option is located, and carries the same strike price, the broker will sell the current option and use the proceeds to purchase the option with the longer term expiration date. This effectively allows the investor to enjoy an additional term or spread of two months, in which the benefits of holding the option will continue.
A time spread approach can be utilized as long as it is possible to identify and purchase similar options with the same strike price. Many investors make use of this strategy on a regular basis, allowing them to take advantage of options with stable strike prices. As with any investment opportunity, both the investor and the broker will take steps to ensure that the combination of purchase and sale will be to the benefit of the investor in both the short term and the long term.