Double Calendars: Is This the Right Strategy for You?

One option strategy designed for a lower-volatility environment you may want to consider is the double calendar.
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If you are looking for an option strategy that is designed for a lower-volatility environment where the underlying price action gravitates towards either of two different strike prices, the double calendar could fit the bill. A double calendar has a wider break-even range, and therefore a larger probability of making a profit than an individual calendar.

In a previous article, I discussed long calendar spreads. If you happened to miss that piece, here’s a quick overview to get you up to speed: Calendar or time spreads have options in two different expiration cycles or series, with the options being both calls or both puts. Calendar spreads involve buying an option in one expiration cycle and selling another option in a different expiration cycle, but with the same strike. Long calendars involve purchasing the further-term option and selling the near term-cycle so that the position remains risk defined. The strategy seeks to take advantage of the underlying trading at or near the strike price, with the highest potential for profit occurring in a rising volatility environment. 

The double calendar is a combination of two calendar spreads. Traders typically buy an out-of-the-money call calendar and put calendar around the current underlying price. The result is a trade that is similar to the neutral single calendar, but instead of having a profit peak at just one strike price, the double calendar has the potential for profit over a wider range of prices. Like the single calendar, the double calendar is designed to benefit from an increase in implied volatility (IV). A double calendar has two peaks or price points where the largest gains can be achieved. The potential max gain can change based on fluctuations in implied volatility.

The price paid for the long double calendar is the risk involved in the spread. With a long double calendar, traders typically adjust or close the trade for credits. The ideal scenario for this strategy would be an increase in volatility which coincides with the underlying moving toward either strike. As it moves closer to either strike, time decay (theta) will increase, which also works in favor of the trade. This occurs because the short near-term options tend to lose value at a faster rate than the further-term long options in the trade. The roll values and calendar prices expand as long as the underlying shares remain within a couple of percent of either strike and implied volatility does not decrease by a significant amount.

Below is a typical Double Calendar Risk/Reward graph with the optimal profitability being near either strike. The example is buying the 13 Apr Weekly 80 puts and 85 calls and selling the 24 Mar Weekly 80 puts and 85 calls for a net debit of $0.90 plus transaction costs:

Figure 1 shows a typical double calendar risk/reward graph with the optimal profitability near either strike.


Max profit in the double calendar is near either strike. Data source: CBOE. Chart source: the TD Ameritrade thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

As shown, the ideal underlying prices for this Double Calendar are at the $80 and $85 strikes in this example. The overall risk is capped at the $0.90 initiation price and if volatility rises, the profit potential will also increase as long as the underlying shares are within a reasonable distance of either strike. Another potential benefit for long calendar trades is that although the initial risk is defined, the profit potential can increase as volatility rises. This is one reason initiating long calendars in a low-volatility environment can be beneficial.

To wrap up, if you expect a move and volatility is low, a double calendar may be a strategy to consider, as it gives you a wide range and a risk-defined downside.

Please remember that calendar, double calendar, and other multiple-leg option strategies like these 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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