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