| Long Call Time Spread: | |
|---|---|
| Short 1 XYZ Sep 50 call @ $2.00, Long 1 XYZ Dec 50 call @ $5.00 | |
| Cost | $300 Debit |
| Maximum Loss: | $300 |
| Maximum Profit: | Depends on value of Dec 50 call at time of Sep expiration |
| Short Call Time Spread | |
| Long 1 XYZ Sep 50 call @ $2.00, Short 1 XYZ Dec 50 call @ $5.00 | |
| Cost | $300 Credit |
| Maximum Loss: | Depends on value of Dec 50 call at time of Sep expiration |
| Maximum Profit: | $300 |
| Long Put Time Spread | |
| Short 1 XYZ Sep 50 put @ $1.00, Long 1 XYZ Dec 50 put @ $3.00 | |
| Cost | $200 Debit |
| Maximum Loss: | $200 |
| Maximum Profit: | |
| Short Put Time Spread | |
| Long 1 XYZ Sep 50 put @ $1.00, Short 1 XYZ Dec 50 put @ $3.00 | |
| Cost | $200 Credit |
| Maximum Loss: | Depends on value of Dec 50 put at time of Sep expiration |
| Maximum Profit: | $200 |
Explanation and Application
Time spreads are so called because they are positions with options in two different expiration months, with the options being either both calls or both puts. Time spreads involve buying an option in one expiration month and selling another option in a different expiration month but with the same strike as the first option. Specifically; a long call time spread is selling a call in a front month at a certain strike, and buying a call in a deferred month at the same strike. A put time spread is selling a put in a front month at a certain strike, and buying a put in a deferred month at the same strike. A short call time spread or put time spread is simply the reverse of the long time spread: long front month and short deferred month. In time spreads, one option in the position expires before the other. You have to keep this in mind because it does present certain risks and necessary adjustments that other types of positions might not.
Time spreads, whether they are call time spreads or put time spreads, maximize their value when the stock is at the strike price of the options, and the front month option is expiring. Time spreads have their minimum value when the stock is very far away from the strike price of the options. If you buy a time spread you want the stock price to be at the strike price at expiration. If you sell a time spread you want the stock price to be as far away as possible from the strike price at expiration.
