Options Spread
In options trading, a spread is created by the simultaneous purchase and sale of options of the same class on the same underlying security but with different strike prices and/or expiration dates.
The three basic classes of spreads are the vertical spread, the horizontal spread and the diagonal spread. They are categorized by the relationships between the strike price and expiration dates of the options involved.
Vertical spreads are constructed using options of the same underlying security, same expiration month, but at different strike prices.
Horizontal or calendar spreads are constructed using options of the same underlying security, same strike prices but with different expiration dates.
Diagonal spreads are created using options of the same underlying security but different strike prices and expiration dates.
Additionally, any spread that is constructed using calls can be refered to as a call spread. Similarly, put spreads are spreads created using put options.
Bull & Bear Spreads
If a spread is designed to profit from a rise in the price of the underlying security, it is a bull spread. Conversely, a bear spread is a spread where favorable outcome is attained when the price of the underlying security goes down.
Credit & Debit Spreads
Spreads can be entered on a net credit or a net debit. If the premiums of the options sold is higher than the premiums of the options purchased, then a net credit is received when entering the spread. If the opposite is true, then a debit is taken. Spreads that are entered on a debit are known as debit spreads while those entered on a credit are known as credit spreads.
Spreads & Combinations
Many options strategies are built around spreads and combinations of spreads. For example, a bull put spread is basically a bull spread that is also a credit spread while the iron butterfly can be broken down into a combination of a bull put spread and a bear call spread.