Options Buyer Risk & Reward (2)

The buyer can profit in several ways.


First and foremost, being a time spread, the buyer can profit by the passage of time.


Options are wasting assets.


So as the nearer month option decays away more quickly than the outer-month option, the spread widens (increases in value) and the buyer sees a profit.



Second, implied volatility can increase.


As implied volatility increases, the out-month option, which the buyer is long, increases in value more quickly (due to its higher vega) than the nearer month option which the buyer is short.


This will force the spread to widen or increase in value, which again is profitable for the buyer.