“Japanese yen” (below) shows the currency’s call options for June, September and December 2013. The heights of the options price curves are 2.76%, 3.54% and 4.21%, respectively,demonstrating a typical increasing spread between curves as the time to expiration shortens.
The widening spread as options approach expiration makes it possible to base spread trades on differences in the call price curve heights because the lower the height — except for options that are far out-of-the-money — the closer the option is to expiration and the faster the spread widens between the price curves. The varying speeds suggest selling a shorter-term call or put while buying an option that has a longer time to expiration. Because more deferred options are usually priced higher than the nearer puts or calls (options in contango), this is generally a debit trade when a single option is traded on each side.
An example based on the current yen price curves would involve buying a December call and selling the September call at the same strike price. If the curves widened in the same way shown by September to June, the price changes could be estimated for any of the strike prices shown on “Japanese yen.”