Spreads involve combining options to formulate suitable option trading strategies on the same underlying and of same type (call/ put) but with different strikes and maturities. These are limited profit and limited loss positions. They are primarily categorized into three sections as:

Vertical spreads are created by using options having the same expiry but different strike prices. These can be created by using calls of same expiry but different strike prices, or can be created by using puts with similar nuance.

Horizontal spread involves options with the same strike, same type but different expiry dates. This is also known as calendar spread or time spread. The underlying reasoning for executing and participating in horizontal spreads is that these two options would have different time values and the trader believes that difference between the time values of these two options would widen or shrink. This is actually a strategic play on premium difference between two options prices squeezing or widening.

If the implied volatility on the near-term option is higher than the IV for the far-dated option and also one is expecting the volatility to fall over the term suggests that one should sell the near-term expiry option and buy the far-expiry option; of the same underlying.

Diagonal spread involves a combination of options having same underlying but different expiry dates as well as different strikes.

Spreads are limited profit and limited loss strategies that involve combining options on the same underlying and of same type (call/ put) but with different strikes and maturities.

Vertical put spread is created by the purchase and sale of different strikes of put options of the same underlying and same expiry.

Vertical spread is created by the purchase and sale of different strikes of options of the same type (either call or put), of the same underlying and same expiry.

The 3 types of option spreads are vertical spread, horizontal spread and diagonal spread.

The different types of vertical spreads are as follows: