Here’s what you need to know about double calendar spreads and how they are used in options trading.

What Is a Double Calendar Spread and How Does it Work?

To understand the workings of the double calendar spread, you first have to know how an ordinary calendar spread works.

This type of spread involves opening two positions on the same underlying asset simultaneously, but with two different delivery months.

A typical calendar spread involves a near-term sell option with a buy option in a later month.

Importantly, the two options that make up the spread will also share the same type and strike price. Thus, a single calendar spread might look as follows:

• Sell 50 ABC June 20 strike calls
• Buy 50 ABC July 20 strike calls

Under ideal conditions, the near-term option will expire out of the money, allowing the trader to capture the premium from it. After the first option expires, the long-term option stands on its own.

From that point on, the long-term option can have a potentially unlimited profit, provided it moves in the direction the trader predicted when constructing the spread. In this sense, the premium from the short-term option offsets the cost of the long-term option, reducing the overall cost of the trade.

The same basic structure is used in a double calendar spread. When the spread is doubled, however, each delivery month will include both a call and a put option, as opposed to the single option type deployed in a standard calendar spread.

If the strike prices in each leg of the spread are the same, each month’s options effectively form a straddle.

Alternatively, the spread can be constructed with each leg at a different strike price, in which case each month’s options take on the characteristics of a strangle strategy.

An example double calendar spread of the latter type might look as follows:

• Sell 20 ABC October 35 strike calls
• Sell 20 ABC October 30 strike puts
• Buy 20 ABC November 35 strike calls
• Buy 20 ABC November 30 strike puts

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Why Trade This Spread?

The point of all calendar spreads is to profit from increases in implied volatility over time.

When a particular security is expected to experience low volatility in the short term but higher volatility during a later time period, a calendar spread can be quite useful. For this reason, a calendar or double calendar spread may be preferred when an election, earnings report or other news event is likely to increase an asset’s volatility after a certain date.

Because a double calendar spread can have two legs that form a strangle in each month, it offers two areas of maximum profitability, with one peak at either of the two strike prices.

This contrasts with the strictly neutral single calendar spread, in which profits are maximized when the price of the underlying asset is at or very near to the strike price of the options.

As a result, there is more potential for profit across a range of prices when using a double calendar spread, while the potential downside remains well defined.

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Building a Double Calendar Spread

To build a double calendar spread, it’s important to first select an appropriate underlying asset.

Generally, you’re looking for a security that you believe will be stable in the near-term, then trend moderately bullish or bearish on a longer time scale. After that, you will have to decide on your expiration dates.

Most traders construct their double calendar spreads with a gap of one month between the first and second expiration dates, though this may vary depending on your market expectations.

It’s also important to understand that calendar spreads can be adjusted after they have been placed. For instance, market movements may make it profitable to buy long-term options at a higher or lower strike price after your initial purchase.

As with any options trading strategy, careful risk management is important when trading double calendar spreads.

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Understanding the Risks

While double calendar spreads can offer reasonably good profits and defined, manageable downsides, they are not without their risks.

Even with a straddle or a strangle in each of the two delivery months, market conditions can turn against your position and prevent you from realizing the gains you expected.

Likewise, if the event you’re expecting to produce enhanced volatility later on fails to do so, you may find yourself holding options without much in the line of upside.

For these reasons, calendar and particularly double calendar spreads are usually recommended for reasonably experienced options traders.

>> Options Trading For Dummies

How to Place a Double Calendar Spread

To put a double calendar spread in place, you should start by opening an account with a leading options trading broker such as tastyworks.

Brokers that understand the risks and rewards of complex options strategies are in the best position to ensure your success when constructing spreads.

Often, the resources, tools and research materials a broker makes available to you are instrumental in helping you execute profitable trades.

tastytrade SPOTLIGHT
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The article What Is A Double Calendar Spread? was originally posted on Investormint

Investors spend a lot of time thinking of ways that they can mitigate risk while still earning money. The delta neutral strategy stands out as one of the most popular ways for beginning and advanced traders to lower their risks.

Explaining delta neutral trading often gets complicated because experts want to use detailed examples. Unless you have years of experience, though, you need a straightforward explanation that doesn’t use a lot of fancy terms.

First, let’s address the term “delta.” In Greek, the word “delta” means “change.” Investors use it in a similar way, today. When they talk about an option’s delta, they’re talking about the positive or negative change in that option’s value.

With delta neutral trading, we apply the term “delta” to several stocks, options, and even futures in your portfolio. The idea is to offset negative deltas with positive deltas to reach balance in the portfolio.

How do you do this?

Delta Neutral Trade Example

Let’s look at a very simple example. If you have 100 shares of stock in your portfolio that you own with a delta of +100, you can reach delta neutrality by purchasing two put options that have deltas of -50.

You can’t always ensure that your delta neutral trading strategy will reach zero.

Ideally, you try to come as close to zero as possible.

>> What Are The Best Options Trading Books?

How Do Delta Neutral Strategies Make Money?

When you first learn about delta neutral strategies, you probably stop and wonder how they can make money. If you’re always striving to reach zero, how can your portfolio generate profits?

Delta neutral strategies provide various ways for traders to make money.

One common strategy encourages you to move away from delta neutrality when you spot a swing in the market. If your portfolio is completely neutral, then you can quickly take advantage of price increase and decreases.

An investor who has committed to a positive or negative strategy doesn’t have as much flexibility. He or she is locked into the market’s whim. With delta neutrality, you can change your investment strategy immediately to make money regardless of whether the market moves up or down.

You can also make money from delta neutral strategies by using a collar trade. Let’s say you own 100 shares of long stock. You can also add one long put and one short call. In this situation, you can expect the combination of bearish options to protect you from loss.

If the 100 shares fall in value, the short call and long put should increase in value.

Having the option to exercise your put option makes it possible for you to either earn money or walk away with a small loss.

Another way delta neutral traders make money is through selling time value. Initially, a trade could be structured as delta neutral but as time goes by the theta decay on short options could possibly earn the trader income.

>> Options Trading For Dummies

Why Apply Delta Neutral Hedging?

Investors cite several reasons to delta hedge. Some of the most common reasons include:

• Maintaining periods without directional bias so you can make a quick decision at the right moment.
• Temporarily hedging a position until you know enough to make an informed move.
• Protecting profits or locking in profits.
• Stop portfolio losses before they become significant.

You might notice from this list that some advantages apply to experienced traders while others apply to beginners.

If you don’t have a lot of experience trading, then you can use a delta hedge to watch the market move and learn about investing features without jeopardizing much money. Basically, you get a cheap way to learn a lot about investing in stocks, options, and futures.

Experienced investors will often put delta hedges in play when they realize that the market isn’t behaving as expected.

Perhaps a media story has forced a stock’s value to plummet. When this happens, going into delta hedge mode prevents previous gains from flowing out of your portfolio. You will probably lose some money, but you can gain some control over the loss.

>> Best Options Trading Platforms

What Is a Delta Neutral Straddle?

If you’re already familiar with the concept of “straddling,” then you can probably guess the meaning of “delta neutral straddle.”

When you straddle, you buy or sell either a call or put option with the same price and expiration date. As long as the option moves a certain amount, either up or down, you will make money from the deal. It’s an example of how you can make money from market volatility instead of betting that a stock’s value will increase.

With a straddle, you don’t care whether an option increases or decreases in value. You just believe that it’s overpriced or underpriced.

A delta neutral strategy combines straddle and delta neutral concepts. When you use this strategy, your purchases offset each other to reach a zero delta (more often than not, you end with 0.5 or -0.5 delta, but you do your best).

>> What Is The Top Options Trading Broker?

What Does Negative Delta Mean?

Delta Neutral Portfolio: If you don’t offset your risk with opposite options, then you could fall into a negative delta. A negative delta means that the change in value is less than zero.

You can still make money from a negative delta strategy, especially if you try to utilize a neutral delta straddle. You do, however, accept a little more risk. More often than not, investors want to remain on the positive side.

Several online platforms will let you use neutral delta strategies. Look for an option that meets your expectations so you can see how it works for you.

How To Trade Trade Delta Neutral Strategies

Not all brokers are made equal so if you are planning to trade delta neutral trading strategies, picking a platform that specializes in options is a must.

tastyworks or thinkorswim are both excellent choices. They rank among the best options trading platforms for trading delta neutral and other complex trades.

Both options platforms were built by teams of expert options traders so you can be confident that if you want to view a delta neutral risk graph, place delta neutral trades or simply want fast and accurate order execution they’ll both live up to your expectations.

tastytrade SPOTLIGHT
Investormint Rating 1 2 3 4 5 4.5 out of 5 stars	Commissions: Closing trades for Stocks & ETFs and Options are commission-free Account Balance Minimum: $0 Commissions: $0 flat rate for stocks Get Started via tastytrade secure site

The article What is a Delta Neutral Trading Strategy? was originally posted on Investormint