Double calendar question

M

markncsu

I'm new to double calendars and I'm having a hard time lifting the middle of the "tent" high enough without pushing the breakeven too tight. I think this is due to volatility being low - current IV range on the options are 11-15. I see that simulating a higher IV helps.

My understanding was that Double Calendars are good to get into when IV is low, hoping to benefit from a rise in IV. However is there a point when IV is too low for Double Calendars?
 
Two calendar spreads (sell front month, buy back), with one spread being below current price and the other above.

I'm simulating in thinkorswim using the SPY and can't get the center of the profit curve high enough without pushing breakevens really close.
 
markncsu said:
Two calendar spreads (sell front month, buy back), with one spread being below current price and the other above.

I'm simulating in thinkorswim using the SPY and can't get the center of the profit curve high enough without pushing breakevens really close.
More...

Word of advice....don't. You are scared of losing money. Get over that fear. Putting on two calendars and trying to "raise" your breakevens is not trading. Your software is never going to give you the right profile at t+1 regardless. So it's a moot point. If you want to bet on vol, bet on vol. Double calendars are probably the "worst" way to express that bet.
 
Ah. Yeah. I agree with maverick. This structure will be tough to make money on because for the straddle to make generally the strangle will have to lose unless you have term structure in your favor. Then why not trade the straddle swap instead.

This structure can work well if you trade it as a form of skew (one leg of the two) but it's purely an implied vol trade with some spot correlation. It's primarily a skew trade with some term structure overlay and will take directional risk. There aren't many instances when this is appropriate.
 
markncsu said:
I'm new to double calendars and I'm having a hard time lifting the middle of the "tent" high enough without pushing the breakeven too tight. I think this is due to volatility being low - current IV range on the options are 11-15. I see that simulating a higher IV helps.

My understanding was that Double Calendars are good to get into when IV is low, hoping to benefit from a rise in IV. However is there a point when IV is too low for Double Calendars?
More...
If your opinion is that spot won't move, skip the double calendar. Instead, start with the ATM calendar or fly and add trades as appropriate.
 
Maverick74 said:
Word of advice....don't. You are scared of losing money. Get over that fear. Putting on two calendars and trying to "raise" your breakevens is not trading. Your software is never going to give you the right profile at t+1 regardless. So it's a moot point. If you want to bet on vol, bet on vol. Double calendars are probably the "worst" way to express that bet.
More...

Thanks for your response.

Could you tell me which variables is the software not taking into account that's causing the incorrect profile?
 
markncsu said:
Thanks for your response.

Could you tell me which variables is the software not taking into account that's causing the incorrect profile?
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Most software has a very difficult time modeling skew through both the passage of time and with movement of the underlying. You will find your expiration p&l in most cases will not even remotely resemble that which you see on your "what if" analysis window. And almost all your p&l is going to derive from the skew. In other words, you're flying blind. Calendars are best utilized when you have a directional bias because the directionality will offset volatility estimation error. Also, the limited risk profile is beneficial to the directional trader. But trying to create some monster like structure where you think you have no direction risk and some "tent pole" structure (terminology that gets splattered around at free option seminars and worthless option books) is a waste of time.
 
Maverick74 said:
Most software has a very difficult time modeling skew through both the passage of time and with movement of the underlying. You will find your expiration p&l in most cases will not even remotely resemble that which you see on your "what if" analysis window. And almost all your p&l is going to derive from the skew. In other words, you're flying blind. Calendars are best utilized when you have a directional bias because the directionality will offset volatility estimation error. Also, the limited risk profile is beneficial to the directional trader. But trying to create some monster like structure where you think you have no direction risk and some "tent pole" structure (terminology that gets splattered around at free option seminars and worthless option books) is a waste of time.
More...
+1. Especially the final sentences.
"But trying to create some monster like structure where you think you have no direction risk and some "tent pole" structure (terminology that gets splattered around at free option seminars and worthless option books) is a waste of time."

A lot of newbies though by going to "complex strategies", their chance to success will increase which in reality is a big NO (not even mentioned the commission and slippage incurred for those positions which further reduce your tiny edge). KISS is the best.

Just a note: Those "complex strategies" are not really that complicated, we all went through this route before which eventually we all realized those are just pure BS marketing strategies sold by seminar, snake oil salesman/mentor or worthless book. It is like the trap in the journey that all the options traders had to go through :)
 
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