Time spreads are essentially a strategy for maximizing profits from the buying and selling of securities. The method involves selling an option that is near the end of its term, while purchasing an option that is of the same type that will not come to term until well into the future. This process allows the investor to continue enjoying the profits made from the options in question for as long as the investor chooses.
While time spreads are great ways to keep making profits from various options, time spreads should not be thought of as a sure thing all the time. As with any type of investment strategy, there are always risks involved with the use of time spreads. One of the key components to look at when considering the use of time spreads to expand a portfolio is the volatility of the option. The fact is that every option contains the potential to move suddenly in any direction.
When considering options for time spreads, it is a good idea to avoid any options that seem to be prone to a high degree of volatility. There is a good chance that the performance will be inconsistent between the purchase of the first option and the subsequent sale of that option and replacement with an option of like kind. That type of performance would defeat the purpose of engaging in time spreads, and result in a loss of profit and possibly principle as well.
Before using a time spread strategy with any options, it is a good idea to do your homework. Look over the performance of the options for at least the last year. Determine if there is a consistent performance that shows at least a modest upswing in profitability for investors. Time spreads are not designed to make anyone an overnight millionaire, but they are great ways to made relatively modest investments and secure a profit that in turn will help build a stable portfolio. To test the waters with any option, start out relatively small and then gradually build up as you gain more confidence in the option and can measure tangible results. Taking it slow and easy will seem a bit frustrating at first, but as you become more comfortable with time spreads, you can diversify and have several going at any given time.
When utilizing time spreads in a responsible and organized manner, it is possible to reap a number of benefits from the effort. For instance, you enjoy less risk in the event that something does go wrong with an option unexpectedly. By limiting your risk factor on each option, you can pull out quickly if the need arises and minimize your loss. Second, using time spreads for several different options allows you the chance to make profit from a number of different sources, rather than relying on the good graces of a few. Last, you can quickly modify your options when you see trends in the market that is disturbing to you. This can lead to a lot of peace of mind as well as preventing a sudden severe financial loss.