A good option trade for iron condor traders who are seeking to build up their option trading repertoire is the Weekly Options Double Calendar spread.
What exactly is this trade?
The double calendar is simply two separate calendar spreads located on the same stock or index, usually placed on either side of wherever the underlying is presently trading at.
What exactly is a calendar spread?
A calendar spread is the sale of a closer month option (many times the closest month option) sold at a particular strike price – and the purchase of a farther out month option (many times the next month out option). The farther out month option is purchased at the same strike price as the one that was sold.
Following is a sample of a calendar spread on an underlying we will call XYZ.
Sell 1 April 20 Put Buy 1 May 20 Put
The way this spread generates profits is from the variances which will arise in the volatility stages of the 2 different strike options, as well as from the fact that the front month option will without a doubt decay at a swifter rate than the deeper further out month option.
A calendar spread creates a rather narrow profit tent over the current price of the underlying, while two calendar spreads (a double calendar spread) creates a profit tent that is quite a bit wider and protects a larger area around the underlying current price. This is one reason why iron condor traders find these trades attractive.
Following is a sample of a double calendar spread with XYZ trading at 30.
Sell 1 May 15 Put Buy 1 May 15 Put Sell 1 May 25 Call Buy 1 June 25 Call
A benefit of the double calendar spread when put up against other option income strategies such as the iron condor trade or the credit spread strategy, is the reality that the double calendar spread can handle big violent moves in the stock market much better than other option trades. When one looks at the risk graph of the double calendar trade and then looks at risk graph of a similar iron condor trade, it is very apparent that the double calendar can withstand a quick big move with less pain then if the same move were to occur to an iron condor trade.
Furthermore, soaring volatility rewards the calendar trade, basically pumping further gain into the position. So in a situation wherever the market suddenly tanks and moves downward, what might be a disastrous scenario for an Iron Condor trade could turn out to be a great circumstance for a correctly setup Weekly Options double calendar position.
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