Double Calendar Intricacies

[Mark Johnson]

Joe Peoples and I met in the Discord room today. We attempted to put on a Double Calendar Trade. we found one on DLTR, but after doing the drawings we found out that the Strikes we wanted at the expiration where we wanted to buy options were barely liquid. Below is where we believe we need to improve our understanding of the strategy.
Using TOP, after using the Matrix to find a symbol for a double calendar, one checks the Daily Chart, with Probability cones, of the symbol for the UFO percentage to be greater than 48%. Then one looks to see if there is an expiration just past the next earnings date.
If the symbol passes these tests, the next step is to open the Option Chain for the symbol. Once the chain is open, one changes the Expirations to the expiration just past earnings and the expiration 7 to 14 days from the day one is looking to place the trade.
Next, to be efficient, one is checking for Liquidity before further analyzing the trade, by doing the drawing on the chart. The number of strikes to look at defaults to 3, and ATM. This does not tell one how liquid the Far expiration is except within 3 strikes of the ATM strike. We know that the strikes we will want to use will probably be farther than 3 strikes away from the current symbol price.
How would one write a rule for the number of strikes to check. Should one perform the approximate math to get an estimate of where the one third ranges would be and use that as the number of strikes on the chain to look at? This does not account for being beyond any UFOs which can significantly affect the range.
Should one see how many strikes away from the ATM Strike that the Ask premium is greater than say $0.15 and keep that in mind when doing the Drawing so if the UFOs are beyond that number of strikes, then reject the symbol?
Jose probably explained this in one of the videos where he put on a Double Calendar. I have looked at at least 5 different videos of Double Calendars and I have not been able to determine how to do this Liquidity check effectively.
I would appreciate learning how Jose does the check at this point in the strategy.

Thanks, as always for your help.

Mark Johnson
Note: I canceled the trade after it was not filled in sim after 15 minutes.

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[˲traddictiv]

Hi Mark. Nice question...
There is no need to check at multiple strikes...
Once you have defined your range and have calculated the thirds... this tells you what is the upper price and the lower price for setting up your calendar. From there you pick the nearest strike available to the upper price and the nearest strike available to the lower price.
You only care about that strike. No need to check a few strikes above/below...
Makes sense?

[Mark Johnson]

Hi Jose,
In the videos I re-watched regarding Double Calendars, you check the option chain for conditions of the options prior to determining the thirds in order to be more efficient. I got from the videos that you were looking at the Spread for sure. But I thought you were also checking for Open Interest and Volume, to help determine Liquidity. When the chain first opens it does not have the strikes we are considering so you would change the strikes to the two we are first considering and then check the Bid and Ask premium for a reasonable spread. If the Spread is too great, you then move on to another symbol. But I also thought you looked at Open Interest and Volume to possibly reject the symbol. Am I wrong about this?
I guess I just need clarification about what you are checking on the Option chain BEFORE drawing on the chart and calculating the thirds.

I am also not clear about why you sometimes check the Skew before figuring the thirds. I don't know what the trigger is for checking Skew. I don't positively know what you want to find when you check skew at this point in the analysis either. (This is done prior to deciding on expirations when you do it.)
Mark

[˲traddictiv]

Hi Mark,

Looking at volume and open interest to assess liquidity is always something that makes sense doing no matter the strategy... Having said that, when planning on a range trade, the priority when it comes to strike selection is the range itself...

When it comes to the skew... what you are looking for are scenarios where there is more premium built in the shorter expiration date and less premium to be paid in the longer dated option. That is from an implied volatility standpoint. That way we are emulating a pseudo-arbitrage opportunity by buying and option with much less IV and selling the same strike with a shorter expiration date with much more IV in it...

Hopefully all this makes sense. Great questions!

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