Contents

 What Is A Double Calendar Spread?

 Maximum Loss
 Maximum Gain
 Breakeven Price
 Payoff Diagram
 Risk of Early Assignment
 How Volatility Impacts The Trade
 How Time Decay Impacts The Trade
 Delta
 Gamma
 Risks
 Double Calendar vs Iron Condor
 Iron Condor With Double Calendar
 Double Calendar vs Double Diagonal
 Trade Management
 Short-Term vs Long-Term Double Calendars
 Double Calendar Spread Examples
 FAQ
 Summary

What Is A Double Calendar Spread?

A double calendar spread is an option trading strategy that involves selling near month
calls and puts and buying future month calls and puts with the same strike price.
A double calendar has positive vega so it is best entered in a low volatility environment.
Traders believes that volatility is likely to pick up shortly.
Double calendars have two profit peaks which are usually placed above (using calls)
and below (using puts) the stock price.
This strategy performs well if the stock is trading near the peaks at expiration.
However, it doesn’t perform well if the stock gets into the peak too early.
Another good scenario for the trade is the stock staying flat, but volatility rising.
In this case, the front month sold options will decay in price, but the back months will
hold their value and not suffer too much from time decay.
As you can see below, the trade is in profit at the interim periods when the stock is flat.
The lines below are T+0 (light green), T+14 (red) and T+28 (grey).
The image below comes from OptionNet Explorer. This is our example trade that we will
use for this article:
MSFT Double Calendar Spread Example
Date: June 8th, 2020
Current Price: $187.20
Trade Set Up:
Sell 5 MSFT July 17th, 175 puts @ $2.41
Sell 5 MSFT July 17th, 200 calls @ $2.20
Buy 5 MSFT Sept 18th, 175 puts @ $6.12
Buy 5 MSFT Sept 18th, 200 calls @ $5.73
Premium: $ 3,620 Net Debit
Maximum Loss
While double calendar spreads might look complicated, the maximum loss is actually
very easy to work.
The max loss is limited to the amount of premium paid to enter the trade.
As this is a net debit trade, the most the trader can lose is the net debit. In this example
that is equal to $3,620.
The maximum loss would only occur if the underlying stock makes a huge move up or
down.
Looking at the zoomed out image below, MSFT would have to move to either 130-140
on the downside or 240-250 on the upside for the trade to experience the maximum
loss.
That’s a move of 25.5% down or 28.2% up in 42 days.
Most traders would be able to cut losses well before that happened.

Maximum Gain
Like normal calendar spreads, it is impossible to know the maximum gain and the best
we can do is estimate it.
This is because we don’t know what the value of the back-month options will be when
the front month expires due to changes in implied volatility.
In out MSFT example, we can see that the maximum gain is estimated at around
$1,050 at a price of $175 and $1,210 at $200.
This could be higher if implied volatility on the September options has risen, or it could
be lower if implied volatility has fallen.

Breakeven Price
Like the maximum gain, the exact breakeven price can’t actually be calculated but we
can estimate it.
Looking the MSFT example, we can see that the breakeven points are estimated at
$171.11 and $204.65.

Payoff Diagram
Double calendar spreads have a dual tent shaped payoff diagram.
Each profit zone is centred over the strikes used in the trade.
If we were to place the strikes further away from the current price of the underlying it
would result in a larger valley in the middle of the two peaks.
This example shows how a double calendar would looks if we used 160 and 210 as the
strikes rather than 175 and 200.
Notice there is a large “valley of death” in the middle of the spread. This is ok if you
think the stock will not be trading in exactly the same place at expiration.
This sort of set up can also be a good way to hedge iron condors which do well when
stocks stay neutral.
The other difference with this wider spread is that the trade costs a lot less. Around
$2,000 in this case compared with $3,620 in the earlier example.
Instead of widening the double calendar, let’s bring the strikes in a little closer to 180
and 195.
Here we get another different looking trade with no valley of death at all.
In this case, it is much more of a neutral trade.

Risk of Early Assignment

There is always a risk of early assignment when having a short option position in an
individual stock or ETF.
You can mitigate this risk by trading index options, but they are more expensive.
Usually early assignment only occurs on call options when there is an upcoming
dividend payment.
Traders exercise the call to take ownership of the stock before the ex-date and receive
the dividend.
Short puts can also be assigned early.
The important thing to be aware of is that early assignment generally happens when a
short option is in-the-money.
For this reason, I use puts for the lower calendar and calls for the upper calendar.
That way the short options are likely to stay out-of-the-money which significantly
decreases the chance of early assignment.
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How Volatility Impacts The Trade

Calendar spreads are long vega trades.
Generally speaking they benefit from rising volatility after the trade has been placed.
Vega is the greek that measures a position’s exposure to changes in implied volatility.
If a position has negative vega overall, it will benefit from falling volatility.
If the position has positive vega, it will benefit from rising volatility. You can read more
about implied volatility and vega in detail here.
Looking at our original MSFT example, the positions starts with vega of 158.
This means that for every 1% rise in implied volatility, the position should gain $158.
The opposite is true if implied volatility drops – the position would lose around $158, all
else being equal.
Changes in volatility can have a significant impact on double calendar spreads.
Using OptionNet Explorer, we can see the change here assuming there is a 5%
increase in implied volatility.
This is estimated of course and there are a lot of different factors that could impact the
actual result.
But, it certainly illustrates that a rise in implied volatility is beneficial for the trade.
The opposite is true if volatility drops by 5%, we can see a sharp drop in the profitability
of the trade.
For this reason, it is crucially important to have a very good understanding of implied
volatility including term structure, and how changes can impact your trade.
How Time Decay Impacts The Trade
Just like regular calendar spreads, double calendars are positive theta trades meaning
that they make money as time passes, all else being equal.
The short calls and puts experience faster time decay than the longer-term bought puts.
Overall, our MSFT double calendar has theta of 17 meaning that the trade should make
$17 per day from time decay.

If for some reason the underling stock makes a big move and the trader fails to close
out the trade, it actually becomes negative theta and starts to lose money through time
decay. The red arrows below indicate where this occurs.
However, you should never let your trade get to this position and it should be adjusted
or closed long before then.

Delta
Double calendars can be structured to be neutral, positive delta, or negative delta.
Our MSFT example starts with delta of +14 even though the strikes are placed almost
an equal distance from the stock price.

Below you can see that by moving the strikes to 165 and 190 we have skewed the trade
to the downside with negative delta.
This isn’t the normal setup, as most traders will place the strikes roughly an equal
distance from the stock price, however it could certainly be traded this way if the trader
had a significant bearish bias.

The same thing can be done on the upside if the trader has a strong bullish bias.

Gamma
Calendar spreads are negative gamma trades and that is also the case with the double
calendar variety.
Generally, any trade that has a profit tent above the zero line will be negative gamma
because they will benefit from stable prices.
Gamma is one of the lesser known greeks and usually, not as important as the others.
I say usually, in this post I explain why it can be really important to understand gamma
risk.
Calendar spreads maintain a bit of a natural hedge because they are negative gamma,
but positive vega.
The ideal scenario is that implied volatility rises (good for positive Vega) but realized
volatility remains low (good for negative Gamma).
In other words, you want the stock to stay relatively flat, but show a rise in implied
volatility (the expectation of future big price moves).
Just like with theta, if the stock makes a big move outside the profit tents, gamma can
switch. In this case switching from negative to positive.

Risks
It goes without saying that as a range bound trade, we have a risk that the price of the
underlying will rise or fall sharply causing an unrealized loss, or a realized loss if we
close the trade.
Some other risks associated with double calendar spreads:

Assignment Risk
We talked about this already so won’t go into to much detail here and while this doesn’t
happen often it can theoretically happen at any point during the trade.
The risk is most acute when a stock trades ex-dividend.
If the stock is trading well below the sold call, the risk of assignment is very low. E.g. a
trader would generally not exercise his right to buy MSFT at $200 when MSFT is trading
at $188 purely to receive a $0.50 dividend.
The risk is highest if the stock is trading ex-dividend and the short call is in the money.
One way to avoid assignment risk is to trade stocks that don’t pay dividends, or trade
indexes that are European style and cannot be exercised early.
However, this should not be the primary factor when determining which underlying
instrument to trade.
Otherwise, think about closing your trade before the ex-dividend date if one of the short
options is close to being in-the-money.
Expiration Risk
Leading into expiration, if the stock is trading right around either the short options, the
trader has expiration risk.
The risk here is that the trader might get assigned and then the stock makes an adverse
movement before he has had a chance to cover the assignment.
In this case, the best way to avoid this risk is to simply close out the spread before
expiry.

Volatility Risk
As mentioned on the section on the greeks, this is a positive vega strategy meaning the
position benefits from a rise in implied volatility.
If volatility falls after trade initiation, the position will likely suffer losses.
The other risk with volatility relates to the volatility curve.
Generally speaking, when volatility rises or falls it has a similar impact across all
expiration periods.
However, you could potentially run into a scenario where volatility in the front month
rises (bad for the short options) and volatility in the back month drops (bad for the long
options).
That would result in a double whammy for the trade.
That scenario may not be common but it could happen and it’s important that traders
understand volatility term structure when placing trades that span different expiration
periods.

Transaction Costs And Slippage

Double calendars are complex trades that involve four different option strikes.
There can be significant transaction costs and slippage when trading complex option
strategies.
Remember that trades will need to be opened and closed and also potentially adjusted,
so the transaction costs can add up quickly.
One way to solve some of that problem is by using a commission free broker.

Double Calendar vs Iron Condor

There are some similarities with double calendars vs iron condors in that they are both
income based trades that profit from a stock remaining withing a specific range.
However, there are also some specific differences in that double calendars are positive
vega and iron condors are negative vega.
Double calendars also have a profit tent at the short strikes whereas iron condors do
better when the stock stays well away from the short strikes.
I actually like using double calendars as a way to protect the short strikes for my iron
condors.
Another difference in a double calendar vs iron condor is that the bought options are at
the same strike as the short options but in a future expiration period. An iron condor
uses all 4 options in the same expiration period.

Iron Condor With Double Calendar

Double calendars can be a nice way to protect the short strikes of an iron condor by
creating a profit zone around the short strikes.
Usually with an iron condor, traders don’t want the stock getting near the short strikes,
but by adding a double calendar, we can help mitigate that risk.
Here we have a standard iron condor setup:
And here’s how it would look when we add in a calendar spread at each of the short
strikes:
Notice that the delta hasn’t change but vega has change from -133 to +18 and theta has
increased from 54 to 74. We have reduced our volatility risk and added to our time
decay.
One downside is that there is now more capital required to enter the trade.

Double Calendar vs Double Diagonal

Double calendars and double diagonals are very similar. The only difference is that a
double diagonal places the bought options further out-of the-money.
This has the effect of raising up the middle of the graph, but it can also mean the trade
requires more capital as can be seen below. The double calendar is risking $3,620
whereas the double diagonal is risking $6,520.
Some other differences we can see from the above image is that the diagonal is closer
to delta neutral, has lower vega and higher theta.
The maximum profit is fairly similar but the double diagonal does much better in the
event of neutral prices.

Trade Management
Getting in to a trade is the easy part, how you manage the trade is much harder, but
let’s look at some simple rules you can use to help you manage your double calendar
trades.
As with all trading strategies, it’s important to plan out in advance exactly how you are
going to manage the trade in any scenario.
What will you do if the stock rallies? What about if it drops? Where will you take profits?
Where and how will you adjust? When will you get stopped out?
Lots to consider here but let’s look at some of the basics of how to manage double
calendar spreads.

Profit Target
First and foremost, it’s important to have a profit target.
That might be 30% of the capital being risked in the trade or you may plan on holding to
expiration provided the stock stays within the profit zone.
That’s the first decision.
Another question to ask would be how long do you plan on holding the trade if neither
your profit target or stop loss have been hit? Can you incorporate a time exit into your
trading strategy?
Another profit taking rule you might consider is – closing when the short options drop to
$0.10.
Sometimes the opportunity cost of tying up your margin for the sake of squeezing the
last few dollars out of the trade is not worth it.

Stop Loss
Having a stop loss is also important, perhaps more so than the profit target.
With calendar spreads, you can set a stop loss based on percentage of the capital at
risk.
Some traders like to set a stop loss at 20% of capital at risk. Others might set it as 50%.
If your profit target is 50% and your stop loss is 50%, then any success rate greater
than 50% will see you come out ahead.
Then it’s just a numbers game and making sure you have enough trades to make sure
the statistics play out.
Whatever you decide, make sure it is written down and mapped out in your trading plan.

Adjustments
With double calendar spreads, I like to adjust before the stock reaches the breakeven
price or slightly before.
Once the stock gets past the break even price, losses can start to run away from you if
the stock keeps trending in that direction.
If the stock reaches the break even price and my stop loss has not been hit, I usually
move the whole double calendar or just once side depending on the situation.
In other rare cases I might add a third calendar spread to widen out the profit zone,
provided it’s within my plan to add more capital to the trade.

Short-Term vs Long-Term Double

Calendars
By moving the bought options out further in time, traders can make their trade a long-
term double calendar.
They can then potentially sell multiple months’ worth of calls and puts against the
longer-term bought calls and puts.
Long-term trades have lower time decay because the bought options that are further out
in time decay at a much slower rate than the shorter-term options.
Long-term trades have a higher vega exposure, but that doesn’t necessarily mean that
they will be more profitable in the event of a rise in implied volatility because each
month on the curve is impacted differently.
Generally speaking, a volatility spike will impact shorter-term options much more than
longer-term options.

Double Calendar Spread Examples

Let’s see what happens in our Microsoft example if an investor adopts a profit target of
30% for these double calendars.
The double calendar with the $175/$200 strikes in our first example will result in a profit
of $1102.50.
Its 30% profit target was reached four days later on June 12th.
The payoff diagram on June 12th shows that both the expiration curve and the T+0 line
had risen due to a rise in implied volatility in both the short and the long options.
At the same time, we see that the price of Microsoft remains centred in the double
calendar.
This is the ideal scenario for the double calendar to profit.
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The farther apart double calendar with the $160/$210 strikes has a net debit of $2195.
It reached its profit target in two days resulting in a profit of $755 at 34% of debit paid.
The narrower double calendar with the $180/$195 strike has a net debit of $4063.
It reached its profit target on June 15th resulting in a profit of $1300, or 32%.

FAQ
What Is A Double Calendar Spread?
A double calendar spread is an options trading strategy that involves buying and selling
two calendar spreads simultaneously.
A calendar spread involves buying a longer-term option and selling a shorter-term
option at the same strike price.
By buying and selling two calendar spreads with different strike prices, a trader can
potentially profit from the passage of time and volatility changes, while limiting their risk.

How Does A Double Calendar Spread Work?

A double calendar spread involves buying and selling two calendar spreads at different
strike prices.
The trader profits from the time decay of the shorter-term options and the volatility
changes of the longer-term options.
The risk is limited because the trader buys options with a longer time horizon and sells
options with a shorter time horizon, which reduces the impact of price movements on
the position.

What Are The Risks Of A Double Calendar

Spread?
The main risks of a double calendar spread are that the stock price can move too much
or too little, causing the options to expire worthless.
Additionally, changes in volatility can also impact the profitability of the trade.
Finally, transaction costs and bid-ask spreads can also impact the profitability of the
trade.

When Should I Use A Double Calendar

Spread?
A double calendar spread can be useful when you expect the underlying stock to trade
in a range, with little or no movement.
Additionally, the strategy can be used when you expect volatility to increase, but you are
not sure in which direction the stock will move.
Finally, the strategy can be useful when you want to limit your risk while still having the
potential to profit from time decay and volatility changes.

What Is The Difference Between A Double

Calendar Spread And A Single Calendar
Spread?
The main difference between a double calendar spread and a single calendar spread is
that a double calendar spread involves buying and selling two calendar spreads at
different strike prices, while a single calendar spread involves only one calendar spread.
This means that a double calendar spread has a wider profit range than a single
calendar spread, but also involves higher transaction costs and potentially more
complex management.

Summary
Double calendar spreads are a nice addition to an option income trader’s arsenal
because they are positive vega and can achieve big profits if the stock ends near either
of the strikes.
This type of trade can also be used to hedge exposure on iron condors.
Given that the position contains options across multiple expiration dates, it’s important
to have a solid grasp of implied volatility including how volatility changes impact options
with different expiration periods.
The maximum loss is limited to the premium paid to enter the trade, but the maximum
gain is unknown because of changes in implied volatility.
Double calendars can be traded using longer-term bought options which allows the
trader to sell multiple months’ worth of calls and puts against the long options.
While double calendars are a positive vega strategy, traders still want the stock to stay
within the specified range during the course of the trade.
Trade safe!