Double Calendar: How To Create A Profit Tent
Even though the Calendar Spread may be used in numerous stock market environments, they operate the best in low volatility climates. While soaring volatility levels are wonderful for these trades, sinking volatility levels bring them a lot of pain.
Because calendar spreads generate profits the fastest at neutral to rising volatility levels, many calendar spread traders will wait until an underlyings volatility levels are either at the lowest level of their average range or at least until they are in the lower end of their average volatility levels before placing a trade.
By waiting for these levels, the calendar spread trader is increasing his or her odds that the volatility levels will either remain where they are and not go much lower which could wind up hurting the position, or begin to rise back up which could put their calendar position into profits quite quickly.
Generally the volatility sinks when the current market moves upward and rises when it moves down. This is why many alternative traders will put on calendar spreads when they have a bearish view on the stock they are planning to trade.
A favorite method for option income investors who have a bearish outlook is to put on a calendar spread just below where the market or stock is trading at. If the market or stock they are trading does move down as they believe it will, it will likely move with into the center profit zone of the calendar spread – while at the same time benefiting from the rising volatility that inevitably occurs when there is a bearish move. In such a scenario, a very good profit can be realized in an extremely short period of time.
When using this method with the Double Calendar Spread it’s possible for the trader to increase their odds even more, as they can set up their double calendar position with a skew that not only creates a sweet spot in the area where the trader believes the underlying will be heading, but also provide profit coverage in a wider area that includes the area where the underlying is currently trading at just in case their belief about market direction turns out to be wrong.
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