Indulge me in a little role play. Setting: Low-volatility stock market. Scene: Experienced option trader sells iron condors. Inventory is plentiful. The underlying drops a little, but well within a range of anticipated probabilities. So far, so good, right? Then—and because markets are the big beautiful beasts that we love—implied volatility spikes. Scene-changer: If volatility stays on the rise, it’s going to kill that iron condor setup. Can we consider a stand-in? You bet.
For some option traders, double calendar spreads are one substitute strategy to consider for iron condors. And with weekly options (not monthly expiration) comes the additional opportunity to design a double calendar spread that allows for a quick response to changing market conditions.
Double calendars have a similar risk profile as iron condors—they still burn theta. But they’re intended to increase in profitability if implied volatility rises. The structure of a double calendar is a little different from an iron condor. So let’s rebuild our scene, step by step.
A double calendar combines two out-of-the-money calendars: one put and one call. In our sample, we’ll look at selling a weekly option about 7–10 days from expiration and buying a weekly option 10–14 days out.
Next, let’s see how the greeks might help humble the volatility hecklers. Taken alone, each calendar adds time value to a portfolio and so has positive vega. By buying two at once, it creates a theta-positive trade that has a wider range of prices at which the strategy can potentially be profitable. Therefore, it’s a strategy with a higher probability of meeting your goal than one calendar alone. Of course, the resulting trade is also vega-positive. Because of this, a double calendar can be used to hedge volatility risk or potentially add additional profit during periods of low volatility.
Let’s take a closer look at this risk profile.
A double calendar’s maximum gain has two peaks where the largest gains can be achieved. Therefore, this trade has two different price points of max gain. Max gain can change based on changes in implied volatility, which we’ll talk about in a minute.
The maximum loss for double calendars is the cost of the trade. You cannot lose more than you paid for the spread plus any commissions, fees, or assignment costs.
Because the trade involves options with two different expiration dates, breakeven points are determined by the stock price, implied volatility levels, and time decay. However, do note: these will be tighter with weekly options because you have a shorter time frame.
As you can see from the risk profile chart in figure 1, the ideal scenario is for the stock to trade close to sideways. By moving a little bit up or down, the trade could achieve additional return found in the two max gain peaks.
Changes in implied volatility can greatly increase the potential profits or losses of a double calendar. In fact, it can change the entire risk profile. That means your weekly options can quickly capitalize on rising implied volatility. Higher implied volatility will increase the trade’s current value and maximum potential gain, and expand the gap between the two breakeven levels.
Of course, falling implied volatility will have the opposite effect, so always weigh those risks.
However, keep in mind that the trade’s maximum loss is the opening debit (and the potential cost of assignment and transaction costs). This doesn’t change no matter what happens to implied volatility.
Calendar spreads, iron condors, and other multiple-leg option strategies can entail substantial transaction costs, including multiple commissions, which may impact any potential return. These are advanced option strategies and often involve greater risk, and more complex risk, than basic options trades.
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