Double Calendar: Gaming Volatility
Even though Double Calendar Spreads 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 until these levels are reached, the calendar spread trader is hoping to increase the odds that the volatility levels will either remain where they are and not sink down further (which could wind up hurting the trade), or that they will start to rise back up (which would put their position into good gains 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.
When using this method with double calendars, it's possible for the trader to increase their odds even more, as they can set up their double calendar position with a skew that not only creates a sweet spot in the area where the trader believes the underlying will be heading, but also provide profit coverage in a wider area that includes the area where the underlying is currently trading at just in case their belief about market direction turns out to be wrong.
Article Source: FxTradingStock.com
About the Author
Learn more about double calendar trades. Stop by Ten Nino's site where you can watch free training videos, see real live trading examples, and read a ton of free training materials and free reports. To learn more go to this double calendar site now.
by: Ten Nino
Total views: 5
Word Count: 344
Date: Wed, 23 Jun 2010
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