Bear Call Ladder
Bear Call Ladder entails selling a call that is in-the-money, buying a call
that is at-the-money, and buying a call that is out-of-the-money for the same
underlying instrument with a higher exercise date and price.
Bear Call Ladder also known as the Short Call Ladder is an extension of the
Bear Call Spread. By buying another call at a higher strike, the position
assumes uncapped reward potential if the stock soars. Maximum gain for the
short call ladder strategy is limited when the underlying stock price goes
down. In this scenario, maximum profit is limited to the initial credit
received since all the long and short calls will expire worthless. However, if
the underlying stock price rallies explosively, potential profit is unlimited
due to the extra long call.
bear call ladder is used when the trader or investor believes that the stock
will rise and also experience volatility, and is aiming to make a capital gain.
is trading at $48.00 on May 17, 2004.
the August 2004 50 strike call for $4.20.
the August 2004 55 strike call for $2.40.
the August 2004 60 strike call for $0.80.
Credit = Premium sold - premiums bought
- $2.40 - $0.80 = $1.00
upside profit potential with limited downside.
risk is that the trader or investor is speculating that a stock will make a big
move to the upside. There is limited maximum risk because the trader or
investor buys more calls than they are selling.
between middle strike price and lower strike price minus net credit.
(Downside) = Lower strike + net debit (or + net credit)
+ $1.00 = $51.00
(Upside) = Higher strike + maximum risk
+ $4.00 = $64.00
is the friend of this strategy. The more volatility, the more positive the
of Time Decay
decay is generally harmful when the position is losing money and helpful when
the position is profitable.
traders and investors try to aim for closing out before expiration to capture
profit, or stem loss because there are two long calls. Closing out from medium
term to expiration would be the best strategy.
out. Buy the back the calls sold and sell the calls bought.
from stocks with adequate liquidity, preferably over 500,000 Average Daily
to ensure you understand the direction of the trend and identify a clear area
of both support and resistance
options with good liquidity; open interest should be at least 100, preferably
Strike - Slightly OTM, just above resistance for the stock.
Strike - One or two strikes above the lower strike, i.e., further OTM.
Strike - Above the middle strike, i.e., even further OTM.
medium term to expiration (say around six months) would be safer. Use same
expiration date for all legs.