Double Calendar: What Goes Down Must Go Up

Even though Double Calendar Spreads may be used in numerous stock market environments, they operate the best in low volatility climates. While soaring volatility levels are wonderful for these trades, sinking volatility levels bring them a lot of pain.

Mainly because calendar spreads churn out profit the fastest at neutral to rising volatility levels, some calendar spread traders will wait to make a trade right up until an underlyings volatility either reach the lowest level of their average range, or until they move into the lower third area of their normal volatility range.

By waiting for these levels, the calendar spread trader is increasing his or her odds that the volatility levels will either remain where they are and not go much lower which could wind up hurting the position, or begin to rise back up which could put their calendar position into profits quite quickly.

Typically volatility levels move down because the marketplace heads upward and volatility levels go up because the marketplace moves down. This is why calendar traders will usually put on calendar spreads when they have a bearish view on the stock market or on the underlying asset they are trading.

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.

When using this method with double calendars, it’s possible for the trader to increase their odds even more, as they can set up their double calendar position with a skew that not only creates a sweet spot in the area where the trader believes the underlying will be heading, but also provide profit coverage in a wider area that includes the area where the underlying is currently trading at just in case their belief about market direction turns out to be wrong.

To find out more about this strategy, visit Ted Nino’s site on how to correctly enter, exit, manage and adjust a double calendar trade for consistent income.