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Short Call Ladder-Neutral Strategy

High volume price breakout stocks: IRCTC, REC LTD, COAL INDIA and PFC

Explanation

Short Call Ladder is a bullish option strategyand is an extension to Bull Call Spread Strategy. This strategy is implemented for net credit investments and offers unlimited return (when market moves beyond the higher Strike (OTM) Call) with limited loss potential. Execution of bull call ladder entails selling 1 in-the-money (ITM) or 1 at-the-money (ATM) call option and buying two different higher strikes ATM or OTM calls.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.

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. The position will make profit when the underlying trader between the middle and the higher strike prices. However, when the underlyingsecurity 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.

Risk:

This options strategy has limited losses when the underlying price stays between the strike prices of the two long calls on expiration date.

Reward:

This option strategy limits maximum gain if the underlying asset price moves in down ward direction. However, if the underlying asset price take a steep move on the upside, potential profit is unlimited due to the extra-long call.

Construction

Sell 1 ITM Call Option

Buy 1 ATM Call Option

Buy1OTM Call Option

 

Option Type Expiry Date Strike Price LTP Action No. Of Lots
CALL 27/04/2023 17750.0 72.65 Buy 1
CALL 27/04/2023 17900.0 13.45 Buy 1
CALL 27/04/2023 17600.0 179.4 Sell 1

 

Max Risk Max Reward Lower Break Even Upper Break Even
243.29999 Unlimited -18143.3 -18143.3

 

Market Expiry Payoff 1 Payoff 2 Payoff 3 Net Premium Option PayOff At Expiry
17350.0 0.0 0.0 0.0 93.3 93.3
17400.0 0.0 0.0 0.0 93.3 93.3
17450.0 0.0 0.0 0.0 93.3 93.3
17500.0 0.0 0.0 0.0 93.3 93.3
17550.0 0.0 0.0 0.0 93.3 93.3
17600.0 0.0 0.0 0.0 93.3 93.3
17650.0 0.0 0.0 -50.0 93.3 43.3
17700.0 0.0 0.0 -100.0 93.3 -6.7
17750.0 0.0 0.0 -150.0 93.3 -56.7
17800.0 50.0 0.0 -200.0 93.3 -56.7
17850.0 100.0 0.0 -250.0 93.3 -56.7
17900.0 150.0 0.0 -300.0 93.3 -56.7
17950.0 200.0 50.0 -350.0 93.3 -6.7
18000.0 250.0 100.0 -400.0 93.3 43.3
18050.0 300.0 150.0 -450.0 93.3 93.3
18100.0 350.0 200.0 -500.0 93.3 143.3
18150.0 400.0 250.0 -550.0 93.3 193.3

 

Payoff Chart

 

Example

The market is touching new highs and the trader holds a bullish view but is in a fix seeing fundamentals and technical of the market. He implemented a short call ladder strategy where he sold 1 17600 ITM call at a premium of Rs. 180, bough 1 17750 OTM call by paying a premium of Rs. 73 and bought another deep OTM call option with strike of 17900 at the premium of Rs. 13. Total credit he received by implementing this strategy is Rs. 4350 (180 - 80 - 13) * 50.

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    Scenario1:

    If at expiry instead of rising, the market fall. The trader will keep the net premium received, which is Rs. 4350.

    Scenario 2:

     If the market showed somewhat volatility on the upside and closed near the middle long call at 17750 levels. At that point the trader will make losses on short call and the both long calls will expire worthless. The loss will be equal to Rs. 2835 as shown in table below.

    Scenario 3:

     If the trader bullish view come true and market closes beyond the 17900 levels. At the at time all the strike will become ITM and trader will gain from long calls as the market inches higher as shown in payoff chart above.

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