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2. Basics Concepts – Bull Call Ladder
Proficiency -
Advanced
Direction –
Neutral
Asset Leg –
Long Call+ Short
Call + Short Call
Max Risk -
Unlimited
Max Reward -
Limited
Income
Strategies
3. 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.
4. Description – Bull Call Ladder
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.
5. Context - 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.
6. Context - Bull Call Ladder
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
7. 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.
8. 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.
9. 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.