Double Calendars

[cwelsh 1,497]

Anyone here looked into double calendar spreads very much?

It occurs to me if an earnings play is too "expensive" then, by definition, that means we think the IV premium is over stated. If that's true, then each time a double calendar should be profitable.

I've done no research on this, but it stands to reason. Any thoughts?

[Kim 7,465]

I tried it few times with great success. They are pretty resilient for a fairly large move. Lats time I did CRM 135 calendar. Despite the stock moving 10%, the trade made a small profit. If the stock moves little, the gains can be in the 70-100% range. I think we will try it - probably not for the "official" portfolio but as a speculative trade.

[Rogers 263]

Very interested in this

[Kim 7,465]

Okay, we will do some. But please be aware that those fall under the "speculative trades" category, like post-earnings ICs. In case of a large move, the loss will be substantial.

[cwelsh 1,497]

Okay, we will do some. But please be aware that those fall under the "speculative trades" category, like post-earnings ICs. In case of a large move, the loss will be substantial.

Im curious if the losses would be more than that in a post-earnings IC -- that seems pretty unlikely. But should look at both (inclusive of commissions)

[Kim 7,465]

I think it very unlikely for the calendar to lose 100%. When you do one of your post-earnings IC, we can do the calendar and compare the results.

[kowski06 4]

What is a double calendar spread?

[Kim 7,465]

What is a double calendar spread?

It's like a calendar but you do it with two strikes. For example, with a stock at $100, you could buy August 100 call and sell July 100 call - that would be a single calendar. P/L graph looks like a bell. Or you could buy 90 and 110 strikes and sell the same strikes - the P/L graph looks like a tent.

[tjlocke99 18]

Anyone here looked into double calendar spreads very much?

It occurs to me if an earnings play is too "expensive" then, by definition, that means we think the IV premium is over stated. If that's true, then each time a double calendar should be profitable.

I've done no research on this, but it stands to reason. Any thoughts?

Chris,

Are you talking about holding this through earnings?

Doesn't this fall into the category of "profiting from IV collapse"? Since we don't want to sell a straddle going into earnings and be naked on short positions and ICs often don't work because the OTM strikes are typicall not liquid on most stocks we are looking for another way to play this? I had backtested using a calendar straddle on GOOG and AAPL. That is sell a near month straddle and long an out month straddle. The results were around breakeven without commissions however there were some huge losses, so I was not comfortable with the trade.

Is this what you are thinking?

[Kim 7,465]

GOOG is definitely not a good candidate. It is one of the exceptions where the options are actually underpriced on average - http://seekingalpha.com/article/321059-google-options-underestimated-the-risk-again.

For AAPL, how much back did you go? Last 2 cycles the move was bigger than expected, but going back I think you will have better results.

[tjlocke99 18]

GOOG is definitely not a good candidate. It is one of the exceptions where the options are actually underpriced on average - http://seekingalpha....-the-risk-again.

For AAPL, how much back did you go? Last 2 cycles the move was bigger than expected, but going back I think you will have better results.

Sorry Kim I could not find my old records, but I believe you are correct.

One point that Jeff Augen makes is that the OPEN after an earnings announcement can be very different then the closing price. So some of these trades may look good or bad based on the closing price, when I'd really want to evaluated the open.

I never backtested double calendars. I just want to confirm. We are talking about initiating a double calendar some # of days prior to the earnings announcement and then holding through earnings correct?

[EugeneHill 4]

I think that's the idea. Seems like you'd want to do it right at the IV peak which I would guess is normally the last trading day before earnings. That would also allow you to place both sides of the calendar in the appropriate spot.

[Kelly Park 10]

I'm very interested in looking into this more. Since starting to follow Kim's pre-earnings trades, I have felt that playing the IV drop at earnings should be more predictable and profitable, if setup properly. Shorter holding time, and the ability to use the pre-earnings IV rise as a predictor of the post-earnings IV drop. But I've had trouble finding a trade that has limited loss potential and is resilient to large stock movements. I still have some more learning to do on single calendars, but let's keep studying doubles.

I have also thought about the straddle calendars mentioned above, but Kim, in a Seeking Alpha thread, commented "what's the point?". Wouldn't a straddle calendar be more nuetral to movement in the underlying but still capture time value?

[Kim 7,465]

Okay, lets first clear a common misconception. Doing the calendar with calls or puts is exactly the same when using the same strike. So with the stock at $100, doing 100 calendar with calls or puts will have exactly the same effect. So what you call a straddle calendar has really no point. As a side note, this is true for any options strategy. For example, with verticals, bull call spread (buy 100 call sell 105 call) is exactly the same as bull put spread (buy 100 put sell 105 put). See more details here - http://seekingalpha.com/article/428091-is-it-better-to-pay-or-to-get-paid.

As for double calendars, if you do 95 calendar and 105 calendar, you simply widening the profit zone, compared to the 100 calendar. The downside is that with the stock at 105, the 95 calendar will lose money and will offset some of the gains of the 105 calendar. So it is more conservative play due to wider profit zone, but the gains will be less as well if the stock doesn't move.

No strategy will handle a big move. We are betting on IV collapse, but we are also betting that the move will be less than implied by options. This is true in the long run, but it cannot prevent some occasional big losses. Those are still defined as speculative trades.