Two Courses of Action
Although there may be many motivations for trading a double calendar,
there are only two courses of action: buy it or sell it. While, for example,
the trader’s goal may be to capture theta, buying a double calendar comes
with the baggage of the other greeks. Fully understanding the
interrelationship of the greeks is essential to success. Option traders must
take a holistic view of their positions.
Let’s look at an example of buying a double calendar. In this example,
Minnesota Mining & Manufacturing (MMM) has been trading in a range
between about $85 and $97 per share. The current price of Minnesota
Mining & Manufacturing is $87.90. Economic data indicate no specific
reasons to anticipate that Minnesota Mining & Manufacturing will deviate
from its recent range over the next month—that is, there is nothing in the
news, no earnings anticipated, and the overall market is stable. August IV is
higher than October IV by one volatility point, and October implied
volatility is in line with 30-day historical volatility. There are 38 days until
August expiration, and 101 days until October expiration.
The Aug–Oct 85–90 double calendar can be traded at the following
prices:
Much like a traditional calendar spread, the price points cannot be
definitively plotted on a P&(L) diagram. What is known for certain is that at
August expiration, the maximum loss is $3,200. While it’s comforting to
know that there is limited loss, losing the entire premium that was paid for
the spread is an outcome most traders would like to avoid. We also know
the maximum gains occur at the strike prices; but not exactly what the
maximum profit can be. Exhibit 11.10 provides an alternative picture of the
position that is useful in managing the trade on a day-to-day basis.