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Option Trading Strategy: Setting Up a Double Calendar

May 13th, 2014

Hey! It’s Sasha Evdakov founder of Rise2Learn and in this video I want to share with you how to trade a double calendar or at least that one up so that way you can now position it yourself on your own stock trade.

Now double calendar is very similar to a single calendar but it is two calendars rather than one so I want to go over exactly how to set one up and this is just a quick overview video it's not indepth about adjustments or anything like that. Let me share with you exactly what it looks like first off and then afterwards I want to show you exactly how to do it in a trading program.

Now there are a lot of advantages with the double calendar because it gives you a lot of spread range for the trade. It allows your options to deteriorate a lot quicker at picking up your premium or making more on the premium.

There are a few advantages but unfortunately there are also disadvantages with everything that you get you have to give something which means you're Vega position goes up a lot higher meaning you're Vega risk is slightly higher.

Let me share with you exactly what I'm watching for when I set up a double calendar. Let's take a look at the single calendar spread first before we get into the double calendar and if you didn't watch the video about the single calendar position then you might want to watch that one first because it's base foundation for the double calendar at but I do want to quickly recap the single calendar here.

option-trading-double-calendar.0074

From calendars you're making money from option deterioration in the front-month because the front-month expires much quicker and then you buy the later month as protection so you sell it in the current month and then you buy protection in the later months. So as time moves forward your options deteriorate but the first month that you sell it in, it deteriorates much quicker.

Your max profit would be made from in this example if you bought the calendar spread on the 6 then your max profit would be made if the stock didn't go anywhere and stayed at sixty.

Now your max loss would be achieved if it goes pass that to the right or the left and of course with time things deteriorate you'll slowly make your money and you collect theta which is your premium and the more days that you can hold it then the more money that you will make it.

option-trading-double-calendar.0078

As for a double calendar you're putting it on into positions which creates a little tent effect for your profit picture and this profit picture what happens is now you have two locations where yoy can create your max profit and that’s at the 50 or 70 in this example.

Now you're not really trying to hit those Max profits you’re really just trying to keep your positions safe  and away for major risks so that you can collect your theta and possibly sell a third of your position as time goes on and maybe another third and so on and so forth depending on your strategy but a double calendars, it’s just two calendars set up overlapping one another and that's what creates the tent in the center it’s because they're overlapped.

Looking at a trade screen you can see here that I’m looking at Apple and that we can choose to do one on the June and July option contracts. Normally I do these contracts between 30 and 45 days out you know depending on the strategy but one thing you want to pay attention to before you enter the contract is make sure that over here the option volatility the implied volatility is set to in the month that you're selling is going to be much higher than the month that you’re buying protection in because if you have this in the current month that you're going to be selling which will be 21.41 in our example.

This means we're selling and we're getting a lot of money for our option in June and we're buying protection at a cheaper price because options are priced on the implied volatility, they're priced on the theoretical value on, and you know time of course and a couple of other things with the huge formula that goes in the play but you want to make sure that this is higher than the second month and if it's not and if you try and do something, that's you know a little bit more like this like a twenty and then a twenty-two it's not going to be good.

It’s because you're buying expensive protection but again normally I do these about 30 to 45 days out thirty to forty days you know if you do it less you'll have less room to adjust but you do get faster premium deterioration so it's a give-and-take in the market but to put on a calendar, what we can do is just right click by a calendar and up pops our thing and we can analyze the duplicate trade and here would be our calendar.

option-trading-double-calendar.0295

As we look at the calendar you can see that this already we put some profit on I believe just because of the date that I shifted at it so if we go to today's date which is March 28 you can see I started a negative 18 dollars due to the bid-ask spread. As we move the date further in time you can see that this white line which is our current profit picture and the red line is our exploration.

The white line slowly moves closer to the red line you can see that already we start becoming profitable here at a hundred dollars. Now normally I’ll do like 30 these or a lot more but at least start with 3 because now as time goes on even if it goes up let's just say for a couple days we can take off one right away as a little safety and let the other two ride.

As things continue moving then you take another one off and as things continue moving then you take the rest of but a lot of people they try and hold these for I don't know, all the way to expiration and it just doesn't work.

As far as things go just be cautious about these positions and just you know peel some into strength as things are holding the new sell a little into strength. In terms of adding a double calendar all we’re going to do is we’ll do one, you can do one on the call side and one on the putside it depends on the open interest or you could do both on the calls it's really up to you.

option-trading-double-calendar.0294

Let’s just say we do one on the put side we buy a calendar, we analyze duplicate trade so now we have two calendars you can see it doesn't look like the profit picture I showed you because we don't have enough contracts to match both of them and also we don't have the appropriate strike prices to give us a nice wide even tent picture.

You can see that as I slowly just these positions that this is what happens to the to the tent and it slowly starts to move wider.

option-trading-double-calendar.0223

Now typically because of the vega position that we have on the calendars I do like to start my calendars a little bit with positive Delta or more room on the right side because this vega position can hurt you so what I want to do is actually give it more room to the right then on the left so I want it kind of shifted in that sense just because if you have a vega problem or things come into play and volatility decreases then you'll be hurt and when this volatility decrease that's when it starts heading higher.

In the calendar positions you make additional money in volatility when the volatility actually increases so if volatility goes up one point you can see here in our volatility adjustments, if volatility goes up one point we make money so see the tent will start to spread out. If volatility starts to decrease you can see that the tent actually starts to shrink and get smaller and smaller so it's important that you start with a little bit of a positive Delta.

Let me reset this back to zero. A little bit positive Delta so here it's 320 versus a 123, you know it doesn't have to be a 120 here and 120 there, it needs to give a little room to the upside and the more of these that you do better you'll understand how much to do but just to understand that you need a little extra room when you have a positive Vega.

When you have a negative Vega you want to do it the opposite and go the other ways such as a butterfly and so forth so that’s a double calendar and a of course you can enter these positions right away in terms of a buy double diagonal, double calendar and do it as one position and then you modify your spread here and make the adjustments but if you entered it as one position usually you'll get better fill rates.

That's how you go about with the double calendars and that's how you do it. Normally I prefer to put on the single calendars and then I add the second one in later just to see which way the stock will go if you put on that double right away you do get faster theta deterioration quicker, quick because you're putting onto two calendars rather than one but unfortunately the room to make adjustments later makes it a little bit harder so you have to pay attention in that case as well.

That's the double calendar, that’s how you put one on and you want a nice profit picture when doing this so if I was doing this then you want something like looking like this. You want a nice tent picture for the calendar you don't want it too wide to where the middle just hangs lower even this is ok but once you start getting into let's just say something like this it’s drooping a little too much and you don’t want to see that because there's not a lot a huge profit potential .

There you have a double calendar and exactly how to set one up now as far as adjustments go and some other things behind managing a double calendar we can go over that in another video but that’s a quick overview behind a double calendar and what it is.

Thanks for watching and I hope you enjoy this video and remember to do what you love, contribute to others, and most importantly live life abundantly.

Author: Sasha Evdakov

Sasha is the creator of the Tradersfly and Rise2Learn. He focuses on high-level education speaking at events, writing books, and publishing video courses on business development, internet marketing, finance, and personal growth.

I'm Sasha, an educational entrepreneur and a stock trader. In addition to running my own online businesses, I also enjoy trading stocks and helping the individual investor understand the stock market. Let me share with you some techniques & concepts that I used over the last 10+ years to give you that edge in the market. Learn More

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