Options Buyer Risk & Reward

Like most trades, time spreads have a maximum loss for the buyer.

As a buyer, you can only lose what you have spent.

If you paid $1.00 for the spread then your maximum potential loss is that $1.00.

If you bought the spread for $2.00, then $2.00 is the maximum potential loss.

The buyer of a time spread will be purchasing the out-month option while selling the nearer month option of the same strike in a one-to-one ratio.

Since the out-month option will have more time until expiration than the nearer month option, the out-month option will cost more.

This means the buyer will be putting out money (debit spread) which makes sense.

The buyer can only lose the amount of money they spent to purchase the spread.

Thus the buyer's maximum risk is the cost of the spread.