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Long Call Ladder - An Option Trading Strategy.

In this article, today we will study the long call ladder option strategy. The long call ladder strategy can be seen as the extension of the bull call spread; there is only one difference between both: one additional put option sold. The objective behind selling one extra option contract is to gain more premium, ultimately reducing overall cost.


When to use the long call ladder strategy:

When traders are moderately bullish on the underlying asset, and if the contract expires within the range of the strike prices, you can take advantage of the time value factor. The other case is when the implied volatility of the underlying asset has risen unexpectedly, and you are expecting volatility to fall; at that time also, you can implement this strategy. In simple words, when traders are confident that the underlying asset will not have any significant movement and will remain within the range


How to enter the long call ladder?

To enter the long call ladder strategy, traders must purchase one in-the-money call option, sell one at-the-money call option, and sell one out-of-the-money call option, all from the same underlying asset and having the same expiry dates. Traders may choose different strike prices at their convenience.


Highest profit on the strategy?

Traders can profit from this strategy if the underlying stock closes between the strike prices of call options. The profit potential is limited as it is a range-bound strategy. In order to avoid any type of loss situation in this strategy, traders are suggested to use the stop-loss on their position.


Breakeven points of the strategy:

The strategy has two breakeven points as below:

  • Upper breakeven point = total strike price of short call - strike price of long call - Net premium paid.

  • Lower breakeven point = strike price of long call + Net premium paid.

How to exit from the strategy?

There is only one way to close the position and for mitigating the risk of the strategy, which is to buy back the short options contract and sell the long options contract.


Illustration

Eg. Nifty is currently trading @ 5500. Buying Call Option of Nifty having Strike 5400 @ premium 200, selling Call Option of Nifty having Strike 5500 @ premium 130 and selling Call Option of Nifty having Strike 5600 @ premium 80 will help investor benefit if Nifty expiry happens between 5400 and 5600.

Strategy

Stock/Index

Type

Strike

Premium Inflow

Long Call Ladder

NIFTY (Lot size 50)

Buy Call

5400

200 (Outflow)

Sell Call

5500

130 (Inflow)

Sell Call

5600

80 (Inflow)

The Payoff Schedule and Chart for the above is below.


Payoff Shedule

NIFTY @Expiry

Net Payoff (Rs.)

5100

500

5200

500

5300

500

5400

500

5500

5000

5600

5000

5700

500

5710

0

5800

-4500

5900

-9500

6000

-14500


In the above chart, the breakeven happens the moment Nifty crosses 5710 (since net inflow is ₹10). The risk in such a strategy is unlimited.


In the above illustration there is a net inflow for the investor. If for any case there is a net outflow, there would be one lower breakeven point. The point will be calculated as (Buy Call Strike price + net premium paid)

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