Calendar Strangle – An Advanced Neutral Trading Strategy

Calendar Strangle is an advanced options trading strategy, which is used by the traders with a neutral market perspective.

We have provided all the data pertaining to the strategy and neutral market in this article.


What is the Calendar Strangle?

A Calendar Strangle has quick short strangle and a long-term profit from the security price being steady in the profit from a good price movement taken from the longer perspective. This is the most appropriate approach for traders with a neutral stance.

However, the trader should be experienced in this kind of approach and realize those couple of strategies and their working methods.

They are a perfect tactic for the time frame leading into important earnings reports, where the outcome will be evocative, but the approach is expected to be sleepy.

This plan should be considered for when a longer-term breakout is expected.


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Key Points of Calendar Strangle

Calendar Strangle is a trading strategy that is multi-legged. It is a strategy where the outcome is meaningful but the approach to the earning reports is expected to be sleepy. Calendar strategy includes a near-term short strange and longer-term long straddle.

It is designed in a way to profit when the stock is expected in the short term to move within a tight channel.

However, keeping the potential for the profits, should help the stock stage a breakout. It writes a short term strangle and buys a long term strangle.

Despite the longer decay period of the small term, the Calendar Strangle strategy optimizes the profit.

It helps the trader to keep the long-term strangling as he might have to close the short-term strangle at any point. An explosive breakout is expected to be staged by the underlying stock.

Some of the key points are

  • It is a neutral strategy
  • It has a debit spread i.e. the result is a net outflow of cash.
  • The trader should be experienced

Why use a Calendar Strangle?

The Strategy is used when the trader believes that the security price will not fluctuate within the short term, however, it might show a difference in the long term.

The neutral trading strategy brings back a profit first, if the neutral viewpoint is correct. It is primarily an idea that can improve in gain from increased volatility.

If there is some volatility in the long term expected, then this one should certainly be considered and not for novice traders.


What is the Right Time to Use Calendar Strangle?

This strangle strategy could work well when the stock remains within a simple range in the short term while the trader expects it to phase a breakout in any direction going further.

The Calendar Strangle strategy is used when in the short term, the underlying stock may remain within a narrow range and in the long term, the underlying stock might go through a breakout in any direction.

It is a useful strategy for the potential volatile event in the next few days. These events can be either the results of important research and development or the important verdict of the court.

There would be implied volatility in the few months that lead to such events.


Find out other Neutral Option Trading Strategy here

Calendar StraddleCovered PutShort Straddle
Covered CallShort StrangleCall Ratio Spread
Butterfly SpreadAlbatross SpreadIron Condor Spread

Calendar Strangle Strategy – Example

Consider an example, A trader is trading at INR44 in February. The trader is waiting for an important verdict of the court in June.

The June Call is quoted at INR1.50, June Put is quoted at INR1.30, March Call is quoted at INR0.55, and March Put is quoted at INR0.50.

There is Jun Call buy to open June Put whereas there is March Call set to open March Put. The net effect is INR1.75 net debit.

In the example discussed earlier, the trader uses the Calendar Strangle strategy to profit from the close short strangle coming with extrinsic values. The June Long Strangle is kept in place for the important verdict of the court that would be in June.

The new short term strangles will be written for April and May whereas the June long strangle is kept for the verdict.

The court verdict that is awaited in June can either explode the stock prices upward or downwards. The net debit of this Strangle is lower than the Calendar Straddle in the example.


How to Create a Calendar Strangle?

This tactic is a mix of the short and the long strangle. Both puts and calls options which are four options transactions.

Here, the trader must make sure the short strangle is created with the close expiry date with long strangle having a longer expiry date.

The trader has to write out-of-the-money calls with close expiration date and work on writing the out-of-the-money puts within the same expiration date, buy out-of-the-money calls with a longer expiry date and do the same with the puts with similar expiry date.

The trader has to work on these four transactions.


Find out more relevant Neutral Option Trading Strategy below

Condor SpreadCalendar Put SpreadIron Albatross Spread
Calendar Call SpreadShort GutCovered Call Collar
Put Ratio SpreadIron Butterfly Spread

Example for Ignoring Commission

An example of ignoring commission costs are

Let us take a firm X stock trading at INR 100 and they believe the price to remain the same for a tentative period with the possibility of moving in either way.

Any call with a quick expiry date and an INR 105 strike trading at INR 10. Leg A is one contract given for a credit of INR 1000.

On the other hand, put with the same date and a strike of INR 95 could be trading at the same strike and Leg B will write a contract for an extra INR 1000.

The same scenario would be trading at a call strike for 105 INR and a put strike price of INR 95 and both be trading at INR 20. Now, Leg C and Leg D will buy a contract at INR 2000.

The net debit (upfront cost) is Rs.2000 i.e. Rs.4000 total cost of options -Rs.2000 total credit received.


Profit & Loss Potential of Calendar Strangle

Traders can obtain profit in two ways one of which is with the help of higher time decay rate between the short and long strangles and the other being with the help of the long strangle in a prize breakout.

The trader should buy the options that can be worthy of a total value which should be higher than the net cost when working on this spread creation.

The amount of profit is ambiguous and tough to determine and calculate but Black Scholes model [C0 = S0N(d1) – Xe-rTN(d2)] can be encompassed, to predict the value of options.

However, the trader must not have complete confidence in the method because probability is the factor that makes trading interesting.

Taken from the theoretical perspective, the trader must see some profit that provides fundamental security without or minimal any price fluctuations and when the security makes a substantial move in price before the expiry date, then the losses should be minimal sticking to the original investment from the trader’s end.

If in profit written expiring, a decision is to be made about proceeding further at this point. Selling it at this point, finalizing the position, and bringing back a profit or holding on to the options present as now effectively it has transformed into having a long position.

If the first prediction that the security is expected to go through a volatility period is correct, it is possible for long strangles to bring profits.

If the price of the underlying security is about to stage a breakout, short strangles can immediately be closed and remains with the long strangle at that stage.


Advantages of Calendar Strangle

  • When the stock is stagnant for the short term, a profit can still be generated.
  • Losses are very limited and restricted to the original investment made.
  • There is a lack of option for position transformation into the long strangle when there is a Breakout expected from the stock.

Disadvantages of Calendar Strangle

  • If the stock stages a breakout suddenly, it would result in an eventual loss.
  • Knowledge required of a medium stock trader.
  • Legging into the position in 4 legs is required to ensure or enhance profitability making it a complex strategy.
  • The amount of commissions incurred is high due to the four transactions.

Calendar Strangle – Conclusion

Calendar Strangle is popular among the traders given there is a possibility of profit from the security price with the flexibility of transformation into longer strangle making the whole idea powerful enough.

When the trader uses it in the right situations, it can fetch better results. However, the trader must also be ready to look out for maximum loss and high risk equally.


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