Double Calendar: Gaming Volatility PDF Print E-mail
Written by Ten Nino   
Monday, 21 June 2010 10:44
While Double Calendar Spreads can be used in various market conditions, they perform best in low volatility environments. Rising volatility levels help these trades, while sinking volatility levels hurt them.
by TenNino


While Double Calendar Spreads can be used in various market conditions, they perform best in low volatility environments. Rising volatility levels help these trades, while sinking volatility levels hurt them.

Because calendar spreads generate profits the fastest at neutral to rising volatility levels, many calendar spread traders will wait until an underlyings volatility levels are either at the lowest level of their average range or at least until they are in the lower end of their average volatility levels before placing a trade.

By waiting until these levels are reached, the calendar spread trader is hoping to increase the odds that the volatility levels will either remain where they are and not sink down further (which could wind up hurting the trade), or that they will start to rise back up (which would put their position into good gains quickly).

Normally volatility levels sink as the market moves upward and rise as the market moves down. This is why many option traders will place calendar spreads when they have a bearish view on the market.

A popular method for option investors with a bearish outlook is to place a calendar spread slightly below where the market or stock is trading at, with the expectation that as the market or stock does head downward, not only with the underlying move directly into the sweet spot of their calendar position, but the volatility will also rise, super charging their calendar trade into a very good profit.

This method can also be used with double calendars, and in fact many option traders would argue that it would be preferred. Using a double calendar could increase the probability of taking profit from the trade as it could be placed with a skew that would not only create a wider sweet spot inside the profit tent for the underlying to get caught in, it could also supply an extended profit tent coverage over the area where the underlying is trading at when the trade is first initiated, providing a safety net if it turns out that the traders speculation on direction turns out to be incorrect.

DISCLAIMER: This article is provided as information only and is not to be taken as financial advice.

Learn more about double calendar trades. Stop by Ten Nino's site where you can watch free training videos, see real live trading examples, and read a ton of free training materials and free reports. To learn more go to this double calendar site now.