What is an option spread?

An option spread is a basic building block of option trading strategies. An option spread is created by simultaneous buying and selling of options of the same underlying and expiry. The strike prices of the options are different. A spread constructed using Call Options are called Call spread and those using Put Options are called Put spreads.

You can use these spreads to lower their cost of investment as you pay a premium for buying Option but receive a premium for selling Option. So your net premium is less. The spreads are also useful in minimizing the risk in a trade and limiting the losses.