Derivatives are financial instruments based on underlying assets, like stocks, bonds, or commodities. Options represent the most famous variety.
With an option, you can acquire the right, but not the obligation, to buy or sell a certain asset at a certain price at a certain point in the future. So you can acquire an option to buy 100 shares of MSFT stock at $130 (the $130 represents the "strike price" for the option), expiring two months from now.
A horizontal spread is a combination of derivatives that looks to take advantage of volatility over time. To utilize the strategy, an investor will take both a long and a short position on the same underlying asset.
The structure means the investor has both a bet that the asset will go up in price...and a bet that the price will go down. The strike price for the bets will be the same. However, the expiration dates will be different. One of the bets (either the long or the short) will have a short-term expiration. The other bet will have a longer-term expiration.
When you look at a stock chart (or the chart of any asset, for that matter), prices move up or down, meaning they are tracked on the vertical axis. Meanwhile, time keeps moving forward, tracked on the horizontal axis. Hence the name for this strategy: a horizontal spread. The investor has two positions, separated by time...or, looking at it graphically, separated horizontally on a standard price chart.
Horizontal spreads are looking to take advantage of the timing of some short-term event. An FDA ruling, an earnings release, an economic report, etc. For that reason, the strategy is also known as a calendar spread, or a time spread.
Related or Semi-related Video
Finance: What is Spread To Treasuries?3 Views
Finance allah shmoop what is spread to treasuries All right
all right close that play bond magazine there people The
answers are all right here Spread to treasuries is not
a type of you know art photo but rather it's
an indication of risk associated with a given debt or
bond offering In the investing world Everything is calculated as
some additional premium or additional cost or additional capital rental
percentage all tact on to the safest investment in the
world Things from the us treasury like t bills and
bonds stuff like that from treasury We'll think about it
like you're going to a restaurant looking at the dinner
salad there for three bucks It's the cheapest thing on
the menu if you wanted a steak Well that state
costs fif eighteen dollars but it's a spread or premium
to the dinner salad of twelve bucks right Three bucks
for the south and you'd have to add twelve from
state prize You get stick And if you really wanted
to just use smaller numbers so that your customers would
have the illusion that they were paying fewer box for
dinner well you could describe everything in your restaurant as
some spread to dinner salad such that this medium rare
rib eye was in fact simply a spread to salad
or premium of twelve bucks Even though you're paying fifteen
anyway Us treasuries air broadly considered to be the safest
bond bet in the world at least today until china
or robots or both take everything over So when a
bond offering is made it is priced relative to treasuries
in the same way dinner items would be priced relative
to that dinner salad house salad there with the oil
and vinegar dressing that is if the bond offering is
for say ten years than the u s treasury ten
year paper that moment would be the foundational elements against
which their risk your debt instruments would then be priced
So let's say that today that ten year treasury paper
is yielding three point two percent Caterpillar tractor wants to
borrow a billion dollars to build their new tractor smelting
plant there then offered by investors one hundred twenty basis
point spread to treasuries debt deal to a fund that
factory with a billion dollars of debt What does that
mean It means that lenders are willing tto loan caterpillar
A billion dollars payable in ten years at three point
two percent per year plus one point two percent for
total interest of four point four percent interest per year
You know take it or leave it That's it So
to recap this is play bond magazine and this is
play But magazine reads it for the articles Really weird
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