Bear Call Ladder

Bear Call Ladder

Post By - Laxmi Mahera
Review By : Rohan Sharma
Updated on : October 26, 2021

Basics Concepts – Bear Call Ladder

Description - Bear Call Ladder

The Bear Call Ladder is an extension to the Bear Call Spread. By buying another call at a higher strike, the position assumes uncapped reward potential if the stock soars.
if the stock rises above the higher (buy) strike, we make potentially uncapped profit;
if the stock falls to anywhere between the middle and lower strikes, we make our maximum loss.
The extra leg also ensures that we may have two breakeven points.
Sell lower strike calls.
Buy the same number of middle strike calls with the same expiration date.
Buy the same number of higher strike calls with same expiration date.

Introduction to Bear Call Ladder

Outlook

A Bear Call Ladder is a Bear Call Spread with an additional
bought call leg further OTM.

Rationale

To execute a bullish trade for a capital gain while reducing your maximum risk. The higher strike bought calls will have the effect of uncapping your upside potential.

Effect of Time Decay

Time decay is generally harmful when the position is losing money and helpful when the position is profitable.

Time Period to Trade

Depending on the reasons for the trade, it’s safest to choose a medium to long term to expiration, enough time to allow the underlying asset to move and make the position profitable without time decay destroying the long options.

Breakeven Down = Lower strike – net debit (or + net credit)

Breakeven Up = [Higher strike + maximum risk]

Steps to Trading a Bear Call Ladder

Steps In

The selection of your option legs really depends on whether you’re using the strategy as a repair to the Bear Call Spread or as a Bear Call Ladder in its own right .
Try to ensure that you understand the direction of the trend and identify a clear area of both support and resistance.

Steps Out

Manage your position according to the rules defined in your Trading Plan.
In any event, look to unravel the position at least one month before expiration, either to capture your profit or to contain your losses.

Exiting the trade - Bear Call Ladder

Exiting the Position

With this strategy, you can simply unravel the spread by buying back the calls you sold and selling the calls you bought in the first place.
Advanced traders may leg up and down as the underlying asset fluctuates up and down. In this way, the trader will be taking smaller incremental profits before the expiration of the trade.

Mitigating a Loss

Unravel the trade as described previously.
Advanced traders may choose to only partially unravel the spread leg-by-leg.

Advantages and Disadvantages

Advantages

Uncapped profit potential.
Capped risk.

Disadvantages

Confusing as to whether this is a bullish or bearish strategy.
The trade may be a net debit, whereas the standard Bear Call Spread is a net credit.
Typically used as a repair to a Bear Call Spread; therefore, this is only for more advanced traders.

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Derivatives Analysis

Advanced Option Strategy