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How to Trade Options » OPTION TRADING STRATEGIES » The Calendar Straddle Option Strategy

The Calendar Straddle Option Strategy

Enjoy the Flexibility of the Calendar Straddle – One Covers the Other

The Calendar Straddle is an options strategy formulated to earn a profit when low volatility is present in the underlying asset. It is also called a neutral options strategy.

It is a combination of both a short term straddle and a long term straddle. The trader sells the short term straddle and buys a long term straddle with the objective of realizing profit due to the slower rate of time decay on the long term straddle compared to the short-dated one. Since short-dated options expire more rapidly than longer-dated ones, the difference becomes your profit.

A calendar straddle is also known as a horizontal spread because the trader purchases option contracts that expire on one date while selling other options expiring on another date. You’re also looking to take advantage of the differences in the options implied volatility for different time periods. As a trader, you should only use this strategy when you can purchase the longer-dated options at a relatively cheaper price than the shorter-dated ones that you’re selling.

The best time to pick a calendar straddle strategy is when the price action of the underlying stock or other asset is expected to remain stable in the short term but in the longer term should break out to make a more significant move. In this case, all the options should finish at the same strike price.

calendar straddle

 

Two Ways the Calendar Straddle Profits

This type of trading is mostly done by veteran options traders. Profits can be achieved in two different ways. Firstly, from the higher rate of time decay on the short-dated options compared to the long-dated ones, and secondly, through a secondary profit realized by the longer-dated straddle following a reasonable price movement in the underlying.

The Calendar straddle is appealing because it has the ability to profit when the price action of the underlying asset is stagnant. It also offers flexibility to the trader to cash in on the long term straddle when the value of the stock is expected to reach a breakout stage. It also has limited risk with no margin required to hold the trade.

If you expect the value of the underlying to move significantly shortly after the expiration of the short-dated options (weekly or monthly) then you can allow the short-dated straddle to expire without rolling further. If not, then once expired, and assuming your long-dated options are a few months away, you may wish to sell another short-dated straddle position and receive more income if you think the conditions are right.

The profit associated with this trading technique is limited in the short term but can be huge in the longer term. Losses are limited to the net debit after subtracting the credit from the short position from the longer-dated straddle. Using risk graphs, you can determine your expected profit levels.

Calendar Straddle strategies provide one of the best opportunities to benefit from stocks with consolidating or stagnant price action or in a tight trading range. The only disadvantage is that profit potential is limited up until the expiration of the sold options. After that, if you’re lucky, the price of the underlying could explode, the implied volatility might balloon on your bought positions so that theoretically, profits could be unlimited.

The calendar straddle, or neutral options strategy, is an advanced options trading strategy. It is simple to implement and the only variations might be how far away you choose for the expiration of your long straddle. The determining factor would be implied volatility (IV). You should choose months with the lowest IV. By doing it right, you can make a stable income with minimal risk.

Enjoy This Video About the Calendar Straddle

 

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DISCLAIMER: All stock options trading and technical analysis information on this website is for educational purposes only. While it is believed to be accurate, it should not be considered solely reliable for use in making actual investment decisions. This is neither a solicitation nor an offer to Buy/Sell futures or options. Futures and options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed in this video or on this website. Please read "Characteristics and Risks of Standardized Options" before investing in options. CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVERCOMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.