I love to find profitable trade ideas and teach traders how to manage those trades in MTM’s daily live group coaching class. And if you have spent any time with me in class over the past several years, you have seen me model out long double calendars. My favorite underlyings for these trades have been SPY and IWM, but I have also done them on stocks and other ETFs. They have done better at some times than others, but overall they have excelled. With implied volatility (IV) skews still the norm, there are plenty of chances to do more long double calendars. Let’s take a look.
Recent IWM Example
At the time of this writing, volatility in the market was high and there were several inflation numbers expected to be released. In class on a recent Monday, we looked at a potential long double calendar on the Russell 2000 ETF (IWM). In the 6-month daily chart below, you can see there was a potential resistance level around $208 and a potential support level at $202. IWM was trading almost in the middle of those two levels.
We also noticed that the Friday expiring options had IV levels around 21% and the Monday expiring options had IV levels around 17.5%, courtesy of several volatility events that week. In essence, the Friday options we would be selling would be more expensive than the Monday options we would be buying. That gives the option traders an edge.
The Game Plan
With the underlying trading just above $205, we did the Mar-15/Mar-18 202/208 double calendar. We sold the Mar-15 expiration, which was Friday (202 put and 208 call), and bought the Mar-18 expiration, which was Monday (202 put and 208 call), as seen below. The cost was 0.42 ($42 in real terms).
The P&L diagram is an estimate at the short expiration because of the two different expirations. There will be changes in theta and IV levels that will affect the position over time. But as you can see below, it sure looked good on paper!
The diagram showed the max profit at either $202 or $208 to be over $125, which is really good based on the cost of $42. The guesstimate break-evens were from about $199 to the downside up to just over $212 to the upside. Not too bad overall, at least on paper. There would be changes in IV levels, time passing and naturally the ETF would be moving around. Option traders needed to keep that in mind, but it looked like a potentially nice risk/reward and probability for profit.
Fast forward to late Friday (the short expiration). The position was trading at 0.72 as seen below. That is a 0.30 ($30 in real terms) profit on an 0.42 ($42 in real terms) risk. Better than a 70% return on the investment. Not bad!
Final Words
As I often say in group coaching, why not? If you have been in class, I know you are familiar with double calendars and how effective they have been lately. If you haven’t, it is time to learn! You are truly missing out, both from an educational as well as potential profit standpoint.
