Calendar Spreads Vs Iron Condor
Dear Sir,

I would like to know whether doing calendar spreads is better than doing Iron condor. I understand that Margins are higher in Calendar spreads & lower in Iron condor. If that
is the case is there any benefit in doing calendar spread going over to next month contract.



Hello Sarath,

When you do an iron condor, the passage of time is your ally and volatility is your enemy.  Iron condors do best when the underlying stock or index doesn't undergo severe price changes and the options slowly lose value over time.

When you buy a calendar spread, you have more choices.  If you buy a spread that is at the money or nearly at the money, then the same market conditions that make the iron condor a winner also make the calendar spread a winner. A calendar spread owner benefits most when expiration arrives and the underlying is priced very near the strike price.

However, when bullish on the underlying stock, you can buy an out of the money call calendar spread.  In that scenario, you profit if the stock moves higher and approaches the strike price.  If bearish, you can buy an out of the money put calendar spread and profit when the stock moves lower and approaches the strike price.

As with iron condors, if the stock moves too far beyond the strike price of the option you sold - profits disappear and turn into losses.

The point of the above discussion is that iron condors are preferred by investors who have a neutral market outlook, even though both types of spreads will be profitable when the underlying stock doesn't change price significantly.  And a bullish (or bearish) iron condor trader can skew the strike prices to reflect his or her market bias.

But, there is one aspect of calendar spreads that is makes it very different from iron condors, and that's the implied volatility (IV) of the options.  When you do an iron condor, you are short some vega (volatility component in the value of an option), but when you buy a calendar spread, you are long a significant amount of vega.  Thus, when it's time to close your calendar spread, if IV has increased, your profit potential is much greater than you may have originally hoped because the long option is worth more when its IV is elevated.  On the other hand, if IV has decreased, then the value of your long option may be so low that you have a loss on the trade, even though the stock is trading right at the strike price.  Thus, calendar spreads involve vega risk.

'Better" is a tough word.  If you want to wager that the implied volatility of the longer-term option is headed higher, then calendar spreads are better.   If you prefer to make a smaller  wager on IV, or if you believe IV is not going to increase, then iron condors are better.  If you prefer to own a portfolio that is 'vega neutral' then you can open some of each spread at the same time.

NOTE:  The double diagonal spread is a combination of iron condor and calendar spread, and is long vega.

Margin should not be a major consideration for most traders.  Sure it's beneficial to own positions that require less margin, but you don't want to be trading near your limit because that could subject you to a margin call.  NOTE:  When you buy a calendar spread, you pay the cost of the spread and there is ZERO margin requirement.  Thus, calendars have a lower margin requirement than iron condors.


Mark D. Wolfinger
The Rookie's Guide to Options:
The Beginner's Handbook of Trading Equity Options