A double calendar spread can be either a combination of the strangle or straddle option strategy along with the principles of calendar spread trading.
A strangle option is where you simultaneously purchase an equal number of call and put options, but both positions having strike prices that are out-of-the-money at the time of entry.
Never Underestimate the Power of a Double Calendar Spread
We now take this principle and add to it another dimension. To turn a strangle position into a double calendar spread, we simply ensure that our bought (long) options have an expiry month further out than the options we are about to sell.
For example, let’s say we are entering our position in May of some year. We would buy an equal number of JULY call and put options at strike prices, say $5 apart (let’s assume $25 puts and $30 calls). To this setup we now add the SALE (going short) of the same number of calls and puts, but with JUNE expiry dates. So in the case of our example here, we would sell June $25 puts and also June $30 calls.
Should the underlying price action subsequently explode beyond the $25 or $30 levels, one of your short options will increase in value while the other will decline. At this point you could choose to buy back your losing ‘sold’ option for next to nothing and continue holding the losing long position. Your other ‘sold’ option that would ordinarily expose you to unlimited risk will be protected by your longer dated bought option, since they have the same strike price.
The same principle can be applied to convert straddles into a double calendar spread. Only in this case the strike prices are all the same.
Double Calendar Spread – Criteria for Entry
Before you consider placing a double calendar spread, there are a couple of things you need to see in both the underlying and the options themselves. You should believe that the underlying stock will remain within a trading range for the duration of your short options’ lifespan – so in our example above, until June expiry date.
But here’s the real important one. You should also look at the options implied volatility for both the near month and later month options. You look for what is called a “volatility skew“. These occur when the near month options have an higher implied volatility than the later month options. Since you want to sell the near month options, you would like to receive as much as possible and this is why you look for these skews.
If you notice a volatility skew, it could possibly signal an upcoming earnings report. Since these can produce unpredictable results for stock prices, you should first check that an earnings report is NOT on the horizon before placing the double calendar spread trade. If the volatility skew is a natural one and shows at least a 2 percent difference, you have a good candidate for entry.
Analyzing the Double Calendar Spread
Before executing your double calendar spread, the final thing you need to look at is a risk profile graph. The risk graph will show a range of stock prices at which the position will make a profit. Ideally, the current market price of the underlying at time of entry should be in the centre of the risk graph. This will allow you enough movement to the upside or downside before your breakeven points are breached and any adjustments may be necessary.

Analyzing the double calendar spread payoff diagram.
The beauty of this position is that because you are on the selling end of options contracts, you have ‘theta’ or ‘time decay’ working in your favour. Maximum profits are achieved when your near month options both expire worthless because ‘at-the-money’ while your long dated options still have enough time value to close the whole position for a profit.
Enjoy This Video About Double Calendar Spreads
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