Even though the Calendar Spread can be utilized in various stock market circumstances, they function finest in low volatility situations. Increasing volatility levels help these trades, while sinking volatility winds up hurting them.
Because calendar spreads generate profits the fastest at neutral to rising volatility levels, many calendar spread traders will wait until an underlyings volatility levels are either at the lowest level of their average range or at least until they are in the lower end of their average volatility levels before placing a trade.
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.
Normally volatility levels sink as the market moves upward and rise as the market moves down. This is why many option traders will place calendar spreads when they have a bearish view on the market.
A popular method for option investors with a bearish outlook is to place a calendar spread slightly below where the market or stock is trading at, with the expectation that as the market or stock does head downward, not only with the underlying move directly into the sweet spot of their calendar position, but the volatility will also rise, super charging their calendar trade into a very good profit.
When using this same approach with double calendars, it is possible for the trader to greatly increase their odds of profiting, due to the fact that they can position their calendar spread in such a way so that it has a skew that transforms the enlarges the trades profit zone area while at the same time increasing the overall profit tent area of the position so that it covers the area where the underlying instrument is trading at when the trade is initiated, providing a larger safety net from risk if it turns out that the traders prediction on direction is completely wrong.
Because calendar spreads generate profits the fastest at neutral to rising volatility levels, many calendar spread traders will wait until an underlyings volatility levels are either at the lowest level of their average range or at least until they are in the lower end of their average volatility levels before placing a trade.
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.
Normally volatility levels sink as the market moves upward and rise as the market moves down. This is why many option traders will place calendar spreads when they have a bearish view on the market.
A popular method for option investors with a bearish outlook is to place a calendar spread slightly below where the market or stock is trading at, with the expectation that as the market or stock does head downward, not only with the underlying move directly into the sweet spot of their calendar position, but the volatility will also rise, super charging their calendar trade into a very good profit.
When using this same approach with double calendars, it is possible for the trader to greatly increase their odds of profiting, due to the fact that they can position their calendar spread in such a way so that it has a skew that transforms the enlarges the trades profit zone area while at the same time increasing the overall profit tent area of the position so that it covers the area where the underlying instrument is trading at when the trade is initiated, providing a larger safety net from risk if it turns out that the traders prediction on direction is completely wrong.
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To learn more about Calendar Spread technique, click over to Ted Nino's site on how to acceptably place, take off, negotiate and adjust Calendar Spread for ongoing income.
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