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.
Mainly because calendar spreads churn out profit the fastest at neutral to rising volatility levels, some calendar spread traders will wait to make a trade right up until an underlyings volatility either reach the lowest level of their average range, or until they move into the lower third area of their normal volatility range.
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 well-liked technique for income calendar spread traders with a bearish outlook would be to place a calendar spread slightly below where the stock is presently trading at, with the hope that as the stock does start to head down as they anticipated, it will move directly into the center of their calendar position as the volatility soars - quickly pumping a significant gains into their calendar trade.
This method can also be used with the double calendar spread, and in fact many option traders would argue that it would be preferred. Using a calendar spread could increase the probability of taking profit from the trade as it could be placed with a skew that would not only create a wider sweet spot inside the profit tent for the underlying to get caught in, it could also supply an extended profit tent coverage over the area where the underlying is trading at when the trade is first initiated, providing a safety net if it turns out that the traders speculation on direction turns out to be incorrect.
Mainly because calendar spreads churn out profit the fastest at neutral to rising volatility levels, some calendar spread traders will wait to make a trade right up until an underlyings volatility either reach the lowest level of their average range, or until they move into the lower third area of their normal volatility range.
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 well-liked technique for income calendar spread traders with a bearish outlook would be to place a calendar spread slightly below where the stock is presently trading at, with the hope that as the stock does start to head down as they anticipated, it will move directly into the center of their calendar position as the volatility soars - quickly pumping a significant gains into their calendar trade.
This method can also be used with the double calendar spread, and in fact many option traders would argue that it would be preferred. Using a calendar spread could increase the probability of taking profit from the trade as it could be placed with a skew that would not only create a wider sweet spot inside the profit tent for the underlying to get caught in, it could also supply an extended profit tent coverage over the area where the underlying is trading at when the trade is first initiated, providing a safety net if it turns out that the traders speculation on direction turns out to be incorrect.
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