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What is Money Spreads

Money Spreads: Option trading strategies can be classified into various types like those pertaining to combination of one option with another option or set of options, other derivative contracts, stocks, etc. This paper focuses mainly on money spreads. A spread, in simple terms, refers to a strategy as per which an investor takes a long position in one option and another short position in another option. Both the options are identical in all aspects and are made on the same underlying. However, these options differ on the dimensions of exercise prices as well as times to expiration. In situations when the options differ merely on the basis of time left for expiration of the option, the strategies are known as time spreads. Similarly, money spreads are those which differ on the basis of different exercise prices of the options. These options have the same underlying and hence these strategies are called spread strategies as the investor aims to earn payoffs due to the differences (or the spread) prevalent amongst the prices of the options. While carrying this analysis, several assumptions have been made pertaining to existence of perfect markets, zero transaction costs and no market inefficiencies, etc. This paper provides an initial point for structuring option trading strategies.

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