Short Call Ladder Options Strategy

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.