Article

Short Call Ladder Options Strategy

22 May 2017 Nilesh Jain

New Page 1

A Short Call Ladder is the extension of Bear Call spread; the only difference is of an additional higher strike bought. The purpose of buying the additional strike is to get unlimited reward if the underlying asset moves up.

When to initiate a Short Call Ladder?

A Short Call Ladder spread should be initiated when you are expecting big movement in the underlying assets, favoring upside movement. Profit potential will be unlimited when the stock breaks highest strike price. Also, another opportunity is when the implied volatility of the underlying assets falls unexpectedly and you expect volatility to go up then you can apply Short Call Ladder strategy.

How to construct a Short Call Ladder

A Short Call Ladder can be created by selling 1 ITM call, buying 1 ATM call and buying 1 OTM call of the same underlying asset with the same expiry. Strike price can be customized as per the convenience of the trader. A trader can also initiate the Short Call Ladder strategy in the following way - Sell 1 ATM Call, Buy 1 OTM Call and Buy 1 Far OTM Call.

Strategy Sell 1 ITM Call, Buy 1 ATM Call and Buy 1 OTM Call
Market Outlook Significant moment (higher side)
Upper Breakeven Higher Long call strike price + Strike difference between short call and lower long call - Net premium received
Lower Breakeven Strike price of Short call + Net Premium Received
Risk Limited (expiry between upper and lower breakeven).
Reward Limited to premium received if stock falls below lower breakeven.

Unlimited if stock surges above higher breakeven.

Margin required Yes

Let’s try to understand with an example:

Nifty Current spot price (Rs)

9100

Sell 1 ITM call of strike price (Rs)

9000

Premium received (Rs)

180

Buy 1 ATM call of strike price (Rs)

9100

Premium paid (Rs)

105

Buy 1 OTM call of strike price (Rs)

9200

Premium paid (Rs)

45

Upper breakeven

9270

Lower breakeven

9030

Lot Size

75

Net Premium Received (Rs)

30

Suppose Nifty is trading at 9100. An investor Mr. A is expecting a significant movement in the Nifty with slightly more bullish view, so he enters a Short Call Ladder by selling 9000 call strike price at Rs 180, buying 9100 strike price at Rs 105 and buying 9200 call for Rs 45. The net premium received to initiate this trade is Rs 30. Maximum loss from the above example would be Rs 5250 (70*75). It would only occur when the underlying assets expires in the range of strikes bought. Maximum profit would be unlimited if it breaks higher breakeven point. However, profit 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 sold (9000) (Rs)

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

Payoff from 1 OTM Call Bought (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 initiation of the trade, Delta of short call condor will be negative and it will turn positive when the underlying asset moves higher.

Vega: Short Call Ladder has a positive Vega. Therefore, one should initiate Short Call Ladder spread when the volatility is low and expects it to rise.

Theta: A Short Call Ladder has negative Theta position and therefore it will lose value due to time decay as the expiration approaches.

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

How to manage Risk?

A Short Call Ladder is exposed to limited loss; hence it is advisable to carry overnight positions. However, one can keep stop Loss in order to restrict losses.

Analysis of Short Call Ladder Options strategy:

A Short Call Ladder spread is best to use when you are confident that an underlying security will move significantly. Another scenario wherein this strategy can give profit is when there is a surge in implied volatility. It is a limited risk and an unlimited reward strategy if movement comes on the higher side.


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Beginner's Corner

Short Call Ladder Options Strategy

22 May 2017 Nilesh Jain

New Page 1

A Short Call Ladder is the extension of Bear Call spread; the only difference is of an additional higher strike bought. The purpose of buying the additional strike is to get unlimited reward if the underlying asset moves up.

When to initiate a Short Call Ladder?

A Short Call Ladder spread should be initiated when you are expecting big movement in the underlying assets, favoring upside movement. Profit potential will be unlimited when the stock breaks highest strike price. Also, another opportunity is when the implied volatility of the underlying assets falls unexpectedly and you expect volatility to go up then you can apply Short Call Ladder strategy.

How to construct a Short Call Ladder

A Short Call Ladder can be created by selling 1 ITM call, buying 1 ATM call and buying 1 OTM call of the same underlying asset with the same expiry. Strike price can be customized as per the convenience of the trader. A trader can also initiate the Short Call Ladder strategy in the following way - Sell 1 ATM Call, Buy 1 OTM Call and Buy 1 Far OTM Call.

Strategy Sell 1 ITM Call, Buy 1 ATM Call and Buy 1 OTM Call
Market Outlook Significant moment (higher side)
Upper Breakeven Higher Long call strike price + Strike difference between short call and lower long call - Net premium received
Lower Breakeven Strike price of Short call + Net Premium Received
Risk Limited (expiry between upper and lower breakeven).
Reward Limited to premium received if stock falls below lower breakeven.

Unlimited if stock surges above higher breakeven.

Margin required Yes

Let’s try to understand with an example:

Nifty Current spot price (Rs)

9100

Sell 1 ITM call of strike price (Rs)

9000

Premium received (Rs)

180

Buy 1 ATM call of strike price (Rs)

9100

Premium paid (Rs)

105

Buy 1 OTM call of strike price (Rs)

9200

Premium paid (Rs)

45

Upper breakeven

9270

Lower breakeven

9030

Lot Size

75

Net Premium Received (Rs)

30

Suppose Nifty is trading at 9100. An investor Mr. A is expecting a significant movement in the Nifty with slightly more bullish view, so he enters a Short Call Ladder by selling 9000 call strike price at Rs 180, buying 9100 strike price at Rs 105 and buying 9200 call for Rs 45. The net premium received to initiate this trade is Rs 30. Maximum loss from the above example would be Rs 5250 (70*75). It would only occur when the underlying assets expires in the range of strikes bought. Maximum profit would be unlimited if it breaks higher breakeven point. However, profit 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 sold (9000) (Rs)

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

Payoff from 1 OTM Call Bought (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 initiation of the trade, Delta of short call condor will be negative and it will turn positive when the underlying asset moves higher.

Vega: Short Call Ladder has a positive Vega. Therefore, one should initiate Short Call Ladder spread when the volatility is low and expects it to rise.

Theta: A Short Call Ladder has negative Theta position and therefore it will lose value due to time decay as the expiration approaches.

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

How to manage Risk?

A Short Call Ladder is exposed to limited loss; hence it is advisable to carry overnight positions. However, one can keep stop Loss in order to restrict losses.

Analysis of Short Call Ladder Options strategy:

A Short Call Ladder spread is best to use when you are confident that an underlying security will move significantly. Another scenario wherein this strategy can give profit is when there is a surge in implied volatility. It is a limited risk and an unlimited reward strategy if movement comes on the higher side.