Here is a different way to trade the double calendar option trading spread that is worth taking a look at.
Normall, double calendar spreads are initially placed as a double calendar spread. At the start of the trade the one trading the spread will purchase one calendar spread slightly below where the underlying is trading at – and then another calendar spread slightly above where the stock or index product is trading at. This can either be done in two separate trades – or if your options broker allows it, as one trade.
Once the trade is on, as long as the underlying stays between the two ‘profit tents’ you can claim your profit.
However, if the underlying moves too far one way or the other – and rund through your upside or downside break even levels – you will need to adjust the position using one of several different available adjustments.
Another way to place this trade is to simply place just one calendar spread at the money – and then wait to see what the underlying will do. In other words, instead of starting the trade off as a double calendar option position, you would start if off as just a single calendar.
Then, if the underlying moves past the break even levels on either the upside or the downside – you would adjust the position by adding another single calendar spread slightly above or below where the underlying is trading at – creating a double calendar spread. In other words, if the underlying ran up past original single calendar spread upside break even level, we would add another single calendar spread slightly above where the underlying is currently trading at, creating a double calendar. If the underlying moved down past the original single calendar spread downside break even level, we would add another single calendar spread slightly below where the underlying is trading at, creating a double calendar spread.
So rather than starting the position off as a complete double calendar spread, what we are doing with this approach is initiating the trade as a single calendar spread with the plan to turn it into a double calendar spread depending on where the market moves to.
And, if we hit our profit target BEFORE the underlying threatens either side of our original single calendar trade – we simply take the single calendar off and close the trade booking our profits – without ever needing to complete the double calendar trade set up.