Article

Long Call Ladder Options Strategy

19 Aug 2017 Nilesh Jain

New Page 1

A Long Call Ladder is the extension of bull call spread; the only difference is of an additional higher strike sold. The purpose of selling the additional strike is to reduce the cost. It is limited profit and unlimited risk strategy. It is implemented when the investor is expecting upside movement in the underlying assets till the higher strike sold. The motive behind initiating this strategy is to rightly predict the stock price till expiration and gain from time value.

When to initiate a Long Call Ladder

A Long Call Ladder spread should be initiated when you are moderately bullish on the underlying assets and if it expires in the range of strike price sold then you can earn from time value factor. Also another instance is when the implied volatility of the underlying assets increases unexpectedly and you expect volatility to come down then you can apply Long Call Ladder strategy.

How to construct a Long Call Ladder?

A Long Call Ladder can be created by buying 1 ITM call, selling 1 ATM call and selling 1 OTM call of the same underlying security with the same expiry. Strike price can be customized as per the convenience of the trader i.e. A trader can initiate the following trades also: Buy 1 ATM Call, Sell 1 OTM Call and Sell 1 far OTM Call.

Strategy

Buy 1 ITM Call, Sell 1 ATM Call and Sell 1 OTM Call

Market Outlook

Moderately bullish

Upper Breakeven

Total strike price of short call - Strike price of long call - Net premium paid

Lower Breakeven

Strike price of long call + Net Premium Paid

Risk

Limited to premium paid if stock falls below lower breakeven.

Unlimited if stock surges above higher breakeven.

Reward

Limited (expiry between upper and lower breakeven)

Margin required

Yes

Let’s try to understand with an example:

Nifty Current spot price (Rs)

9100

Buy 1 ITM call of strike price (Rs)

9000

Premium paid (Rs)

180

Sell 1 ATM call of strike price (Rs)

9100

Premium received (Rs)

105

Sell 1 OTM call of strike price (Rs)

9200

Premium received (Rs)

45

Upper breakeven

9270

Lower breakeven

9030

Lot Size

75

Net Premium Paid (Rs)

30

Suppose Nifty is trading at 9100. An investor Mr. A thinks that Nifty will expire in the range of 9100 and 9200 strikes, so he enters a Long Call Ladder by buying 9000 call strike price at Rs 180, selling 9100 strike price at Rs 105 and selling 9200 call for Rs 45. The net premium paid to initiate this trade is Rs 30. Maximum profit from the above example would be Rs 5250 (70*75). It would only occur when the underlying assets expires in the range of strikes sold. Maximum loss would be unlimited if it breaks higher breakeven point. However, loss would be limited up to Rs 2250(30*75) if it drops below the lower breakeven point.

For the ease of understanding, we did not take in to account commission charges. Following is the payoff chart and payoff schedule assuming different scenarios of expiry.

The Payoff chart:

The Payoff Schedule


On Expiry NIFTY closes at

Payoff from 1 ITM Call Bought (9000) (Rs)

Payoff from 1 ATM Calls Sold (9100) (Rs)

Payoff from 1 OTM Call Sold (9200) (Rs)

Net Payoff (Rs)

8600

-180

105

45

-30

8700

-180

105

45

-30

8800

-180

105

45

-30

8900

-180

105

45

-30

9000

-180

105

45

-30

9030

-150

105

45

0

9100

-80

105

45

70

9200

20

5

45

70

9270

90

-65

-25

0

9300

120

-95

-55

-30

9400

220

-195

-155

-130

9500

320

-295

-255

-230

9600

420

-395

-355

-330

9700

520

-495

-455

-430

9800

620

-595

-555

-530

Impact of Options Greeks:

Delta: At the time of initiating this strategy, we will have a short Delta position, which indicates any significant upside movement, will lead to unlimited loss.

Vega: Long Call Ladder has a negative Vega. Therefore, one should buy Long Call Ladder spread when the volatility is high and expects it to decline.

Theta: A Long Call Ladder will benefit from Theta if it moves steadily and expires in the range of strikes sold.

Gamma: This strategy will have a short Gamma position, which indicates any significant upside movement, will lead to unlimited loss.

How to manage Risk?

A Long Call Ladder is exposed to unlimited risk; it is advisable not to carry overnight positions. Also, one should always strictly adhere to Stop Loss in order to restrict losses.

Analysis of Long Call Ladder Options strategy:

A Long Call Ladder spread is best to use when you are confident that an underlying security will not move significantly and will stays in a range of strike price sold. Another scenario wherein this strategy can give profit is when there is a decrease in implied volatility.

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Beginner's Corner

Long Call Ladder Options Strategy

19 Aug 2017 Nilesh Jain

New Page 1

A Long Call Ladder is the extension of bull call spread; the only difference is of an additional higher strike sold. The purpose of selling the additional strike is to reduce the cost. It is limited profit and unlimited risk strategy. It is implemented when the investor is expecting upside movement in the underlying assets till the higher strike sold. The motive behind initiating this strategy is to rightly predict the stock price till expiration and gain from time value.

When to initiate a Long Call Ladder

A Long Call Ladder spread should be initiated when you are moderately bullish on the underlying assets and if it expires in the range of strike price sold then you can earn from time value factor. Also another instance is when the implied volatility of the underlying assets increases unexpectedly and you expect volatility to come down then you can apply Long Call Ladder strategy.

How to construct a Long Call Ladder?

A Long Call Ladder can be created by buying 1 ITM call, selling 1 ATM call and selling 1 OTM call of the same underlying security with the same expiry. Strike price can be customized as per the convenience of the trader i.e. A trader can initiate the following trades also: Buy 1 ATM Call, Sell 1 OTM Call and Sell 1 far OTM Call.

Strategy

Buy 1 ITM Call, Sell 1 ATM Call and Sell 1 OTM Call

Market Outlook

Moderately bullish

Upper Breakeven

Total strike price of short call - Strike price of long call - Net premium paid

Lower Breakeven

Strike price of long call + Net Premium Paid

Risk

Limited to premium paid if stock falls below lower breakeven.

Unlimited if stock surges above higher breakeven.

Reward

Limited (expiry between upper and lower breakeven)

Margin required

Yes

Let’s try to understand with an example:

Nifty Current spot price (Rs)

9100

Buy 1 ITM call of strike price (Rs)

9000

Premium paid (Rs)

180

Sell 1 ATM call of strike price (Rs)

9100

Premium received (Rs)

105

Sell 1 OTM call of strike price (Rs)

9200

Premium received (Rs)

45

Upper breakeven

9270

Lower breakeven

9030

Lot Size

75

Net Premium Paid (Rs)

30

Suppose Nifty is trading at 9100. An investor Mr. A thinks that Nifty will expire in the range of 9100 and 9200 strikes, so he enters a Long Call Ladder by buying 9000 call strike price at Rs 180, selling 9100 strike price at Rs 105 and selling 9200 call for Rs 45. The net premium paid to initiate this trade is Rs 30. Maximum profit from the above example would be Rs 5250 (70*75). It would only occur when the underlying assets expires in the range of strikes sold. Maximum loss would be unlimited if it breaks higher breakeven point. However, loss would be limited up to Rs 2250(30*75) if it drops below the lower breakeven point.

For the ease of understanding, we did not take in to account commission charges. Following is the payoff chart and payoff schedule assuming different scenarios of expiry.

The Payoff chart:

The Payoff Schedule


On Expiry NIFTY closes at

Payoff from 1 ITM Call Bought (9000) (Rs)

Payoff from 1 ATM Calls Sold (9100) (Rs)

Payoff from 1 OTM Call Sold (9200) (Rs)

Net Payoff (Rs)

8600

-180

105

45

-30

8700

-180

105

45

-30

8800

-180

105

45

-30

8900

-180

105

45

-30

9000

-180

105

45

-30

9030

-150

105

45

0

9100

-80

105

45

70

9200

20

5

45

70

9270

90

-65

-25

0

9300

120

-95

-55

-30

9400

220

-195

-155

-130

9500

320

-295

-255

-230

9600

420

-395

-355

-330

9700

520

-495

-455

-430

9800

620

-595

-555

-530

Impact of Options Greeks:

Delta: At the time of initiating this strategy, we will have a short Delta position, which indicates any significant upside movement, will lead to unlimited loss.

Vega: Long Call Ladder has a negative Vega. Therefore, one should buy Long Call Ladder spread when the volatility is high and expects it to decline.

Theta: A Long Call Ladder will benefit from Theta if it moves steadily and expires in the range of strikes sold.

Gamma: This strategy will have a short Gamma position, which indicates any significant upside movement, will lead to unlimited loss.

How to manage Risk?

A Long Call Ladder is exposed to unlimited risk; it is advisable not to carry overnight positions. Also, one should always strictly adhere to Stop Loss in order to restrict losses.

Analysis of Long Call Ladder Options strategy:

A Long Call Ladder spread is best to use when you are confident that an underlying security will not move significantly and will stays in a range of strike price sold. Another scenario wherein this strategy can give profit is when there is a decrease in implied volatility.