Chapter 6: Ratio Call Writing 169 
All spreads fall into three broad categories: vertical, horizontal, or diagonal. A 
vertical spread is one in which the calls involved have the same expiration date but 
different striking prices. An example might be to buy the XYZ October 30 and sell 
the October 35 simultaneously. A horizontal spread is one in which the calls have the 
same striking price but different expiration dates. This is a horizontal spread: Sell the 
XYZ January 35 and buy the XYZ April 35. A diagonal spread is any combination of 
vertical and horizontal and may involve calls that have different expiration dates as 
well as different striking prices. These three names that classify the spreads can be 
related to the way option prices are listed in any newspaper summary of closing 
option prices. A vertical spread involves two options from the same column in a news­
paper listing. Newspaper columns run vertically. A horizontal spread involves two 
calls whose prices are listed in the same row in a newspaper listing; rows are hori­
zontal. This relationship to the listing format in newspapers is not important, but it is 
an easy way to remember what vertical spreads and horizontal spreads are. There are 
many types of vertical and horizontal spreads, and several of them are discussed in 
detail in later chapters. 
SPREAD ORDER 
The term "spread" designates not only a type of strategy, but a type of order as well. 
All spread transactions in which both sides of the spread are opening (initial) trans­
actions must be done in a margin account. This means that the customer must gen­
erally maintain a minimum equity in the account, normally $2,000. Some brokerage 
houses may also have a maintenance requirement, or "kicker." 
It is possible to transact a spread in a cash account, but one of the sides must be 
a closing transaction. In fact, many of the follow-up actions taken in the covered writ­
ing strategy are actually spread transactions. Suppose a covered writer is currently 
short one XYZ April call against 100 shares of the underlying stock. If he wants to roll 
forward to the July 35 call, he will be buying back the April 35 and selling the July 35 
simultaneously. This is a spread transaction, technically, since one call is being bought 
and the other is being sold. However, in this transaction, the buy side is a closing 
transaction and the sell side is an opening transaction. This type of spread could be 
done in a cash account. Whenever a covered writer is rolling - up, down, or fmward 
he should place the order as a spread order to facilitate a better price execution. 
The spreads discussed in the following chapters are predominantly spread 
strategies, ones in which both sides of the spread are opening transactions. These are 
designed to have their own profit and risk potentials, and are not merely follow-up 
actions to some previously discussed strategy.