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Long Call Ladder-Neutral Strategy

Options-Trading-Beginners

Explanation

Bull call ladder option trading strategy is a neutral to moderately bullish strategy. This strategy is implemented for net debit investments and offers limited return (when market stays in between Middle strike (ATM) and higher Strike (OTM) Call) with unlimited loss potential. Execution of bull call ladder entails buying 1 in-the-money (ITM) or 1 at-the-money (ATM)call option and selling two different higher strikes ATM or OTM calls. This Strategy is an extension to Bull Call Spread Strategy. The purpose of selling the higher strike calls is after considering the primary assumption of neutral market and to reduce the cost of implementing overall strategy. It is a spread strategy, because it consists of a Long and a Short position. It is also a vertical strategy, because a trader bought and sold options have different strike prices.

Risk:

When the underlying price is below the lower strike price, all option will become OTM and position will generate losses equal to net premium paid. However, when the underlying security price become volatile and price moves beyond the higher strike price, the short calls position will generate losses and will continue to rise as underlying security price rises.

Reward:

Maximum gain this options strategy is limited and occurs when the underlying asset price is trading between the strike prices of the call options sold.

Construction

Buy 1 ITM Call Option

Sell 1 ATM Call Option

Sell1OTMCallOption

 

Option Type Expiry Date Strike Price LTP Action No. Of Lots
CALL 27/04/2023 17750.0 78.3 Sell 1
CALL 27/04/2023 17900.0 15.4 Sell 1
CALL 27/04/2023 17600.0 200.7 Buy 1

 

Max Risk Max Reward Lower Break Even Upper Break Even
Unlimited 43.000008 17707.0 17943.0

 

Market Expiry Payoff 1 Payoff 2 Payoff 3 Net Premium Option PayOff At Expiry
17350.0 0.0 0.0 0.0 -107.0 -107.0
17400.0 0.0 0.0 0.0 -107.0 -107.0
17450.0 0.0 0.0 0.0 -107.0 -107.0
17500.0 0.0 0.0 0.0 -107.0 -107.0
17550.0 0.0 0.0 0.0 -107.0 -107.0
17600.0 0.0 0.0 0.0 -107.0 -107.0
17650.0 0.0 0.0 50.0 -107.0 -57.0
17700.0 0.0 0.0 100.0 -107.0 -7.0
17750.0 0.0 0.0 150.0 -107.0 43.0
17800.0 -50.0 0.0 200.0 -107.0 43.0
17850.0 -100.0 0.0 250.0 -107.0 43.0
17900.0 -150.0 0.0 300.0 -107.0 43.0
17950.0 -200.0 -50.0 350.0 -107.0 -7.0
18000.0 -250.0 -100.0 400.0 -107.0 -57.0
18050.0 -300.0 -150.0 450.0 -107.0 -107.0
18100.0 -350.0 -200.0 500.0 -107.0 -157.0
18150.0 -400.0 -250.0 550.0 -107.0 -207.0

 

Payoff Chart

 

Example

Suppose the market indices is trading at17750 levels. The trader holds a scenario where he seesthe market willrise moderately with less volatility. He implements long call ladder options strategy where he buys 1 17600 ITM Call Option at a premium of Rs. 201, shorts same amount of 17750 ATM Call Option for a premium of Rs.78 & shorts 1 17900 OTM Call Option for a premium of Rs. 15. Net outflow in the initial stage by the trader for implementing this strategy would be Rs. 5350 (200-78-15) *50.

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    Scenario1:

    instead of market being neutral, it become bearish and closed at 17500 levels, the trader in that scenario will make a loss equal to net premium paid as all the option will be OTM.

    Scenario 2:

     If the market moves as per the expectation of the trader and closes near 17750 levels, the bought long call will give gains as it has become ITM whereas the trader will gain from the premium of short calls as they expire OTM.

    Scenario 3:

    If the market become volatile at the time of expiry and closes well above the short calls. At that time all the positions will stand ITM and trader will make losses as the price of the underlying rises.

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