A horizontal spread, also known as a calendar spread or time spread, is an options trading strategy where an investor simultaneously buys and sells options of the same type (either calls or puts) with the same strike price but different expiration dates. The options involved in a horizontal spread have identical terms, except for their expiration dates.

Key features and considerations of a horizontal spread include:

1. **Strategy Components:**
– A horizontal spread involves two options: a long position and a short position. Both options have the same strike price, but they expire in different months.

2. **Long Position:**
– The investor takes a long position by buying an option with a later expiration date. This option is expected to have a higher premium due to the additional time value.

3. **Short Position:**
– Simultaneously, the investor takes a short position by selling an option with an earlier expiration date. This option is expected to have a lower premium because it has less time value.

4. **Same Strike Price:**
– Both the long and short options in a horizontal spread have the same strike price. This means that the options are “at the money” or have the same exercise price.

5. **Net Premium:**
– The investor pays a net premium to establish the position. The cost is the difference in premiums between the long and short options.

6. **Profit Potential:**
– The potential profit in a horizontal spread comes from the difference in premium changes between the long and short options. If the longer-term option gains more value than the shorter-term option loses, the spread can be profitable.

7. **Limited Risk:**
– The risk in a horizontal spread is limited to the initial premium paid to establish the position. This makes it a defined-risk strategy.

8. **Breakeven Points:**
– The breakeven points for a horizontal spread are influenced by changes in volatility, time decay, and the stock’s price. The strategy typically profits when the stock’s price is near the strike price at the expiration of the short option.

9. **Volatility Considerations:**
– Horizontal spreads may benefit from an increase in implied volatility. If volatility rises, it can lead to an increase in the time value of the options, potentially benefiting the strategy.

10. **Time Decay Impact:**
– Time decay, or the erosion of option premium over time, is a significant factor in horizontal spreads. The goal is for the longer-term option to retain more value over time, contributing to the overall profitability of the spread.

11. **Neutral to Moderately Bullish or Bearish:**
– Horizontal spreads are often used when an investor has a neutral to moderately bullish or bearish outlook on the underlying asset. The strategy benefits from minimal movement in the stock’s price.

12. **Adjustment Strategies:**
– Traders may adjust horizontal spreads by rolling the short option to a later expiration or by closing out the position to capture profits or manage risks.

Horizontal spreads are versatile strategies that can be implemented in various market conditions. They are commonly used when an investor expects minimal price movement in the underlying asset and aims to capitalize on changes in implied volatility and time decay.