Horizontal Spread

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.