A far option is a type of provision that is included in a calendar spread option, and normally has to do with the later options to buy or sell that are part of the broader option. By creating a spread that involves the buying and selling of a particular asset with different dates, the investor can often use this arrangement to create a position in which a profit is made from the combination of transactions. One of the benefits of including a far option rather than arranging the spread with relatively close buy and sell dates is that there is more time to achieve what is known as an "in" the money status, which simply means the option has more time to take advantage of market movements and allow the price of the goods to appreciate, leading to greater profits.
One of the easiest ways to understand how a far option functions is to consider the creation of a spread that involves selling all the April calls on a given asset, while also locking in the purchase of November calls on those same assets. In this type of arrangement, the selling of the April calls would be considered the near option component in the deal, since that activity occurs at the onset of the spread. The buying of the November calls constitutes a far option, meaning that the buying activity occurs much later than the sale.
The value of this combination of a near option and a far option within a spread is that the investor has the chance to lock in pricing that ultimately makes it possible to reacquire an asset at price that is below market value. Assuming that the value of the assets involved with the call appreciate a great deal by the time of the November purchase of the calls, the investor has the benefit of using the money from the sale in March to generate revenue on other investments, while also being able to exercise the right of purchase on the November calls and secure assets that are worth more than the purchase price. This places the investor in the position of immediately recognizing a return, with the ability to either hold onto those assets if they are still appreciating, or quickly sell them in the marketplace for a quick realization of profit from the venture.
Like any type of investment strategy, a spread configured with a near option and a far option is not without risk. There is always the chance that the asset in question will not appreciate in the interim period and may even experience some sort of decrease in price. When this is the case, the investor ultimately loses money on the strategy. For this reason, carefully choosing the asset for this type of arrangement and accurately projecting its future performance in the marketplace is absolutely essential.
