Double Calendars
Definition : A double calendar spread is the execution of two calendar
spreads that have the same months in common but have two different strike
prices.
Example
Sell 1 XYZ February 70 call
Buy 1 XYZ March 70 call
Sell 1 XYZ February 75 call
Buy 1 XYZ March 75 call
Double calendars can be traded for many reasons. They can be vega
plays. If there is a volatility-time skew, a double calendar is a way to take a
position without concentrating delta or gamma/theta risk at a single strike.
This spread can also be a gamma/theta play. In that case, there are two
strikes, so there are two potential focal points to gravitate to (in the case of
a long double calendar) or avoid (in the case of a short double calendar).
Selling the two back-month strikes and buying the front-month strikes
leads to negative theta and positive gamma. The positive gamma creates
favorable deltas when the underlying moves. Positive or negative deltas can
be covered by trading the underlying stock. With positive gamma, profits
can be racked up by buying the underlying to cover short deltas and
subsequently selling the underlying to cover long deltas.
Buying the two back-month strikes and selling the front-month strikes
creates negative gamma and positive theta, just as in a conventional
calendar. But the underlying stock has two target price points to shoot for at
expiration to achieve the maximum payout.
Often double calendars are traded as IV plays. Many times when they are
traded as IV plays, traders trade the lower-strike spread as a put calendar
and the higher-strike spread a call calendar. In that case, the spread is
sometimes referred to as a strangle swap . Strangles are discussed in
Chapter 15.