In this article, I will explain how to set up, and when to use a Double Calendar Spread.
What are Double Calander Spreads?
It is an option strategy where current month options are sold and far / next month options are bought to protect the losses from huge movements. Selling the current month options is the original trade and buying far month options is the hedge trade. The hedged trades act as a protector.
What strikes are used in Double Calander Spreads?
The same strikes for calls and the same strikes for puts are used.
For example, if you have sold a call option of a stock’s 1000 strike of this month, you must buy a call option of its 1000 strike for the next month. And if you have sold a put option of the same stock’s 950 strike of this month, you must buy a put option of its 950 strike for the next month.
When a Double Calander Spread be traded?
When the VIX (volatility index) is low. You can check INDIA VIX here. Trade a Double Calander Spread when INDIA VIX is below 14. Trade it preferably near the expiry of the current month.
When does a Double Calander Spread make a profit?
A double calendar spread will profit when the stock/index expires near the sold call or put option or it can profit if the stock expires anywhere between the sold strikes but the VIX increases.
When the stock expires near the call or the put option sold, this is what happens:
The sold options expire worthless, and the bought option’s total premium would not have lost too much value because one of the strikes would be in profit due to the direction being on its side. The other bought option would not have lost much value since 30 days are still left for the expiry.
As written above, it will also profit if the VIX increases and the stock/index is anywhere between the sold call and put strikes.
When this happens, both the sold options expire worthless. This pair makes good money for the trader. Due to the increase in VIX, the bought options do not lose much due to theta decay. The premium loss is compensated by the increase in volatility. So the profit from selling the options is more than the losses made by buying the options. Overall the trader is in good profit.
When does a Double Calander Spread make a loss?
If on the expiry day, the stock is above either the call or the put sold strikes. However, since there is a hedge (the bought options), the losses are reduced to a large extent.
If the stock moves too early just after the trade, the trader may get panicked and get out of the trade at a loss. Therefore the trade should be planned well in advance. The trader should know the risks involved in the trade before taking the trade.
There is a platform Sensibull – India’s Largest Options Trading Platform which makes a max profit and loss graph of a trade in advance that a trader plans to trade. This is possible only in the paid version of the platform. The paid version costs Rs.800/- per month. However, if you open an account with this broker you get all the paid services of Sensibull for free.
Conclusion:
Trade Double Calander Spreads when you feel that at least till the expiry the stock you wish to trade on is not going to move much. Do not trade Double Calander Spreads near the result season. During the result season, too many speculative trades take place and almost all stocks witness volatility. Also, avoid trading in stocks going through any kind of news either good or bad. Good news will push the stock north and a piece of bad news will pull the stock towards the south direction which is bad for a Double Calander Spread.
Recommended article:
How to trade neutral calendar spreads
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