Options strategy: Using a short time spread - Options - Futures ...

The easiest way to describe a short time spread is to first look at the long time spread. A long time spread is the simultaneous sale of a short term option (to take advantage of time decay) and purchase of the same option in a back month. Time spreads are worth the most when they are at-the-money (ATM), and once near the money, time spreads become more profitable as time approaches expiration. Since each leg of the spread shares the same strike and will have intrinsic values that cancel each other out, the value of a time spread can be determined by looking at the front month���s option chain time values with one month remaining until expiration. The profit or loss of a time spread, therefore, falls under a normal distribution curve just like an option time premium. As you can see, the long time spread is profitable in a stable market if you can select the correct closing range. The short time spread becomes a powerful strategy that will allow the trader to take advantage of the high volatility. Go back and look at our breakeven/profit range for our long time spread. A short time spread is similar to a long straddle but without the same level of exposure. Perhaps this is why we named the short time spread ���The Poor Man���s Straddle;��� however, we could have just as easily called it ���The Thinking Man���s Straddle." One downside to short time spreads is the large margin requirement, but there is a solution to that as well.