Short Call Ladder Options Strategy
08 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.