Options spreads are the basic building blocks of many options trading strategies. A spread position is entered by buying and selling equal number of options of the same class on the same underlying security but with different strike prices or expiration dates.
The three main classes of spreads are the horizontal spread, the vertical spread and the diagonal spread. They are grouped by the relationships between the strike price and expiration dates of the options involved.
Vertical spreads, or money spreads, are spreads involving options of the same underlying security, same expiration month, but at different strike prices.
Horizontal, calendar spreads, or time spreads are created using options of the same underlying security, same strike prices but with different expiration dates.
Diagonal spreads are constructed using options of the same underlying security but different strike prices and expiration dates. They are called diagonal spreads because they are a combination of vertical and horizontal spreads.
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