While the calendar spread can be used in various market conditions, they perform best in low volatility environments. Rising volatility levels help these trades, while sinking volatility levels hurt them.
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 underlying 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.
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.
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 underlying 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.
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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