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Short Call Ladder - An Option Trading Strategy

This article will help you understand the best strategy traders use while the market is moderately bullish; it is a short-call ladder. This strategy offers unlimited profit on the upside direction and limited profit on the downside. The short call ladder strategy is

the extended version of the bear call spread strategy. The only difference between them is one additional contract bought at a high strike price.


When to use a short call ladder option strategy?

  • The strategy can be implemented when you are expecting high volatility in the underlying asset, especially on the upper side.

  • Traders will experience unlimited profit when the stock breaks the upper strike price.

  • Traders also have a chance to profit if the implied volatility falls significantly.

  • This is the best strategy to use when there is high implied volatility in the upside direction.

  • Make sure you have applied the stop loss to avoid any potential loss scenario.

How to enter the short call ladder option strategy?

To enter the short call ladder, you must sell one in-the-money call option, buy one at-the-money call option and buy one out-of-the-money call option. All these option contacts must be from the same underlying asset and have the same expiry dates.


Another way to enter the short call ladder strategy is - to sell one at-the-money call option contract, buy one out-of-the-money call option contract and buy one far out-of-the-money call option contract.

  • Sell 1 In-the-money call option contract.

  • Buy 1 At-the-money call option contract.

  • Buy 1 out-of-the-money call option contract.

  • Market outlook - higher volatility on the upper side

  • Highest profit - unlimited

  • Risk - limited (it can only be experienced if the stock closes between the breakeven point)

Breakeven point of the short call ladder option strategy:

The strategy will have two breakeven points as follow:

  • Upper breakeven point = strike price of higher long call + strike price difference of short call and lower long call - total premium received

  • Lower breakeven point of short call ladder option strategy = Strike price of the short call + Total premium amount received.

How to exit from the short call ladder strategy:

To exit from the short call ladder strategy, you can change the order position, for example, buy to close.


Illustration

Eg. Nifty is currently trading @ 5500. Selling Call Option of Nifty having Strike 5400 @ premium 200, buying Call Option of Nifty having Strike 5500 @ premium 130 and buying Call Option of Nifty having Strike 5600 @ premium 80 will help investor benefit if Nifty expiry happens above 5700.

Strategy

Stock/Index

Type

Strike

Premium Inflow

Short Call Ladder

NIFTY (Lot size 50)

Sell Call

5400

200 (inflow)

Buy Call

5500

1300 (Outflow)

Buy Call

5600

80 (Outflow)

The Payoff Schedule and Chart for the above is below.


Payoff Schedule

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


Sell call ladder

In the above chart, the breakeven happens the moment Nifty crosses 5710 (since net outflow is ₹10). The reward in such a strategy is unlimited. The risk is limited to 5500 [calculated as (Difference in strike prices + net premium paid) * Lot Size].


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

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