Bull Call Ladder

Bull Call Ladder

Post By - Manav Saini
Review By : Rohan Sharma
Updated on : October 26, 2021

Basics Concepts – Bull Call Ladder

Description - Bull Call Ladder

The Bull Call Ladder is an extension to the Bull Call Spread. By shorting another call at a higher strike price, the position assumes uncapped risk potential if the stock soars upwards.
The net effect of the higher short strike is to reduce the cost and breakeven of the Bull Call Spread and adjust the directional nature of the trade.
The higher call strike prices are further OTM and will therefore have lower premiums than the lower strike bought call.
If the stock falls below the lower (buy) strike, you can make a loss;
if the stock rises to anywhere between the middle and upper (short) strikes, you make your maximum profit;
if the stock rises above the highest strike, then you can make unlimited losses. The extra leg also ensures that you may have two breakeven points.
Buy lower strike calls.
Sell the same number of middle strike calls with the same expiration date.
Sell the same number of higher strike calls with same expiration date.

Introduction to Bull Call Ladder

Outlook

A Bull Call Ladder is a Bull Call Spread financed by selling an additional call further OTM.

Rationale

To execute a direction neutral/conservatively bullish trade for enhanced income.
The lower strike sold calls will have the effect of capping your upside, and the higher strike sold calls will reduce the cost basis and breakeven further, but at the expense of an uncapped downside.

Net Position

This can be a net debit or net credit trade because while your bought calls will be more expensive than your sold calls, you’re selling more calls that you’re buying.
Your maximum risk on the trade is uncapped because you are selling more calls than you’re buying.

Effect of Time Decay

Time decay is harmful to the position around the lower strike price and becomes more helpful around the highest strike price.

Time Period to Trade

It’s safest to choose a shorter term to expiration in order to reduce the possibility of uncapped risk

Breakeven Down = [Lower strike + net debit]

Breakeven Up = [Higher strike + middle strike – lower strike] – net debit

Steps to Trading a Bull Call Ladder

Steps In

Try to ensure that the trend is upward but identify a clear area of support and resistance.

Steps Out

Manage your position according to the rules defined in your Trading Plan.
If the stock falls below your stop loss, then sell the long call, and if you’re not permitted to trade naked
calls, then unravel the entire position.

Exiting the trade - Bull 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.

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

Lower cost and breakeven than a Bull Call Spread.

Disadvantages

Confusing as to whether this is a bullish or bearish strategy.
Uncapped downside if the stock rises.
Typically used as a repair to a Bull Call Spread; therefore, this is only for more advanced traders.

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