Horizontal Spread

A horizontal spread is a type of options strategy that involves buying and selling options of the same underlying security with the same expiration date but different strike prices. The goal of a horizontal spread is to profit from a change in the underlying security's price without taking on as much risk as a traditional option purchase.

There are two main types of horizontal spreads: bull spreads and bear spreads. A bull spread is created by buying a call option with a lower strike price and selling a call option with a higher strike price. A bear spread is created by buying a put option with a higher strike price and selling a put option with a lower strike price.

The profit potential of a horizontal spread is limited, but the risk is also limited. This makes horizontal spreads a good option for investors who are looking to reduce their risk while still participating in the potential upside of a security.

Here is an example of a bull spread:

* Buy a call option with a strike price of $50
* Sell a call option with a strike price of $55

In this example, the investor is betting that the underlying security's price will increase above $50 but not above $55. If the underlying security's price increases above $55, the investor will lose money on the short call option. However, if the underlying security's price increases above $50 but not above $55, the investor will make money on the long call option and the short call option will expire worthless.

Here is an example of a bear spread:

* Buy a put option with a strike price of $50
* Sell a put option with a strike price of $45

In this example, the investor is betting that the underlying security's price will decrease below $50 but not below $45. If the underlying security's price decreases below $45, the investor will lose money on the short put option. However, if the underlying security's price decreases below $50 but not below $45, the investor will make money on the long put option and the short put option will expire worthless.

Horizontal spreads can be used to hedge a long or short position in the underlying security, or to speculate on the direction of the underlying security's price. However, it is important to understand the risks involved before entering into a horizontal spread.