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 | 130 (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 |
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).