General Securities Representative (Series 7) Practice Exam

What is characteristic of a horizontal or calendar spread?

1. Same strike prices

2. Different underlying assets

3. Different expiration months

4. Different exercise prices

The correct answer is: Different expiration months

A horizontal spread, also known as a calendar spread, is characterized by the use of options that have the same strike price but different expiration dates. This strategy involves buying and selling options that are based on the same underlying asset, which allows the trader to capitalize on changes in the underlying asset's price over time and the impact of time decay on the options' premium. Using different expiration months enables the trader to benefit from the volatility of the underlying asset as well as the time value of the options involved. As the expiration date approaches, the time value of the option with the longer expiration typically decreases at a slower rate compared to the one with the shorter expiration, potentially allowing for profit opportunities. The key element of a horizontal or calendar spread is therefore the difference in expiration months, making this the correct choice in the context of identifying the characteristic of this trading strategy.