Stratégies Options - Calendar Spread

We saw, that the calendar spread was a simple strategy on options, which combines the purchase and the sale of options, same type, same underlying, same strike and which differs only from the maturities.
We also saw that this kind of strategy was a bet on the evolution of the spot, more or less far away from the strike as we were "long” or "short" the calendar spread.

A notion extremely important to take into account when we play a calendar spread, is about that is a bet on two instruments which are sensitive to the evolution of their respective implied volatilities.

I - The Calendar Spread : A Bet on the Evolution of Implied Volatilities

The first thing that is necessary to keep in mind, is the behaviour of a calendar when implied volatilities differ.

A short calendar spread 100 6 month / 1YEAR with implicit volatilities both identical to 30 % we have:

A long calendar SPREAD 100 6 month / 1YEAR with implicit volatilities both identical to 30 % we have:

Long-Calendar-Spread-100-6mois/1an-30%-30%-3D

Both graphs are symmetric obviously.

II - Behavior of the Calendar Spread Using Different volatilities

A - if 6 months volatility is 30 % and 1 year one is 40 % we have:

We notice at once that the perspective of maximum loss on the shorts calendar radically decreased, passing from 500 to 400.
The maximum earnings obtained on the borders of graphs, move from 350 to 680 for spot near 162.89 and 66.34.

- for a long calendar ( short 6 months, long 1 year)

This time the opposite of course, the perspective of maximum gain on the long calendar radically decreased, passing from 500 to 400.
The maximal losses obtained on the borders of graphs, move from 350 to 680 for spots near 162.89 and 66.34.
We see on these last two graphs that a volatility long term higher than that of the option short term leads to a P*L that is steepening.

B - 6 months volatility is 40 % and the 1 the year one at 30 %, one has:
- for a position short the calendar ( long 6 months, short 1 year)

- for a position long the calendar spread ( short 6 months, long 1 year)

The reader can draw his own conclusions as for the use of the calendar according to the levels of implied volatilities.

Next : Calendar Spread : The Delta.
Previous : Calendar Spread: A First Approach

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Advanced Strategies - INDEX
Advanced Strategies - CHAPTER I
Advanced Strategies - CHAPTER II
Advanced Strategies - CHAPTER III
Advanced Strategies - CHAPTER IV
Advanced Strategies - CHAPTER V

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