Long Call Ladder Options Strategy
Long Call Ladder is another options trading strategy belonging to the ladder family. Long Call Ladder is not a bullish strategy. The objective of this strategy is to gain from reduced volatility or when the underlying price is not moving swiftly.
This strategy requires less capital deployment compared to other vertical spreads. Long Call Ladder curtails profit significantly below a significant level with unlimited losses. This strategy is constructed using call options with the same expiration date and same underlying, but with different strikes.
The general concept of Long Call Ladder is that as the underlying price increases, the strategy faces uncapped losses and is capped when the underlying price goes down. Greater the price, the greater the loss.
What is the Long Call Ladder Options Strategy?
This is a three-legged strategy, deployed when it is expected that markets won’t move significantly higher and price will be in a range bound zone, with a substantial reduction in volatility.
Long Call Ladder is constructed using three options strikes of the same underlying assets; strikes traded may or may not be equidistant from one another. All three strikes must be of the same expiry.
The strategy is initiated by:
- Buying an In The Money Call Strike (ITM),
- Selling either an At The Money Call Strike (ATM) or Out of The Money Call Strike (OTM),
- Selling another Out of The Money Strike (OTM) above previously sold ATM/OTM call strikes.
A long call ladder is a net debit strategy; here, a trader pays a significant premium for options strikes than what he/she receives, and the long call costs more than the combined premium collected from selling other calls.
When to Initiate a Long Call Ladder Options Strategy?
This strategy should be initiated when a trader expects lower price movement in the underlying asset and during low volatile trading sessions. The movement should be slightly higher or lower; the ideal situation is when markets are in a range bound direction.
Profitability in this strategy is limited to a particular range in respect of the underlying price movement, with unlimited loss when price breaks out the upper range and limited loss if it breaks the range on the downside. This strategy is functional only when the volatility is low.
How to use the Long Call Ladder Options Strategy?
The tables below demonstrate the Nifty50 Index options chain. A trader can refer to the option chain for trading multiple strikes at their available price and contract expiry.
|Strike Price||CHNG (₹)||BIDQTY||ASK QTY||BID||ASK||LTP (₹)|
First table is showing Call Options Strikes at different levels of Nifty50 Index:
- Strike of Nifty 50 Index is in the first column; strike price means levels of Nifty 50. Here, a trader can choose from the given strike based upon his/her strategy.
- Second column shows a change in the premium of that strike until yesterday’s closing.
- Bid Quantity is represented by the third column showing the total quantity of options contracts offered by buyers.
- Ask Quantity in the fourth column is showing the total quantity of options offered for selling by sellers.
- Fifth column is showing the BID rate, which means buyers are ready to buy at that price.
- Sixth column is showing the ASK rate, the price at which sellers are ready to sell.
- Last column is showing the Last Traded Price(LTP), the price at which the options are traded.
|Strike Price||LTP (₹)||BID||ASK||BID QTY||ASK QTY||CHNG (₹)|
Second table is showing Put Options Strikes:
- Strike Price in the first column
- Last Traded price of put options at different strikes in the second column.
- Bid rate is the price at which buyers want to buy puts.
- Ask rate is the price at which sellers want to sell puts.
- Bid qty is the total number of put contracts open for buying at different strikes.
- Ask qty is the total number of put contracts open for selling at different strikes.
- Change in price of puts today till yesterday’s closing has been in the last column.
Objective of this strategy is that the underlying asset will not make a significant movement on either side. The zone marked in yellow shows ITM options strikes of both calls and puts as shown in the tables above; 17800 is at the money (ATM), 17850 for out-of-the-money (OTM) and below 17700 are in-the-money options (ITM) on the call side.
In Put side, 17700 is At the money (ATM), 17800 is In the money (ITM), and 17650 is out of the money.
To build Long Call Ladder Options Strategy assuming Nifty is at 17800, here are the steps to follow to implement this strategy:
- Buying one quantity of ITM call strike at 17700
- Selling one quantity of ATM call strike at 17800
- Selling one quantity of OTM call strike at 17850
This strategy comes with unlimited risk, so it is important to learn the concepts and how a trader could increase probability of success while deploying Long Call Ladder.
Choosing Strike Price
If we assume that the Nifty50 Index is trading at 17800, the different strike prices would be:
- Buy one ITM call Options of 17700 strike at LTP (A) ₹115.15
- Sell one ATM call Options of 17800 strike at LTP (B) ₹65.60
- Sell one OTM call Options of 17850 strike at LTP (C) ₹47.90
- Net Premium Paid A – (B+C) = ₹115.15 – (₹65.60 + ₹47.90) ₹1.65
The ratio for buying must be 1:2:2; every ITM Call purchase must be followed by selling two ATM calls and two OTM calls.
A long call ladder options strategy profits when markets are range bound with or without little price fluctuation. The volatility must be low while initiating this strategy. If Nifty50 breaks the upper range of 17850, strikes of sold call options will rise significantly, and traders will face losses without any limits.
Similarly, in the downward direction of Nifty 50, if it breaks below 17700, traders will be open to limited losses, as the sold call options will cover some losses of the bought ITM calls. The profitability in this trade is limited to the range of upper strike of 17850 to 17700 in the lower side.
The above diagram shows payoff of a long call ladder, vertical axis depicts degree of profit concerning movement in the underlying asset till expiration. By taking the strikes into account, let’s demonstrate the payoff scenario.
Let’s Assume Nifty50 Index trading at 17800
Strategy: Long Call Ladder
Strikes Traded: 17700 (ITM) Quantity 1
17800(ATM) Quantity 1
17850(OTM) Quantity 1
The points between two sold options with strikes 17800, and 17850 have created the zone where the strategy will earn a maximum profit. Beyond both breakeven points, strategy will become unprofitable.
On the lower side, loss is limited to the extent of net premium paid to buy 17700 calls. While on the higher side, with two sold calls, 17800 and 17850, risk exposure is open after breaching the breakeven on the right side, as shown in the above diagram.
- Long Call Ladder comes with a limited profit and unlimited reward payoff structure.
- This strategy remains profitable when the market is not volatile, with a low-frequency price movement in the underlying asset.
- The maximum reward is limited between two sold call options and becomes unprofitable after breaking the higher or lower levels of two sold call strikes.
- Since maximum loss is unlimited, it is advisable to keep a stop loss and not trade this strategy during any events or corporate announcements.
- To increase the profit probability of this strategy, a trader must choose a wide-distance strike between two sold call options and a short-term expiry, preferably on weekly options contracts.
Break Even Point
The break-even in the Long Call Ladder Options Strategy has been calculated below:
Lower Breakeven = (₹17700 + ₹115.15) = ₹17815.15 (Level on Nifty50 Index)
Upper Breakeven = (₹17850 + ₹17800 – ₹17700 – ₹115.15)
= ₹17834.85 (Level on Nifty50 Index)
Maximum Profit = (₹17850 – ₹17800 + ₹115.15)* lot size(50)
Maximum Loss on the higher side is unlimited.
Maximum Loss on lower side is ₹115.14*50 (lot size) = ₹5757.5
The point between the two sold options is the zone of maximum profit. If both the breakevens are breached, the strategy becomes unprofitable.
Analysis of Long Call Ladder Options Strategy
At the time of initiating, position will show a negative delta, indicating that a significant price spike will lead to unlimited losses. The long call ladder is a vega negative strategy; therefore, one should initiate it when expecting a fall in volatility.
This strategy benefits from theta decay, which means sold calls lose their time value while approaching expiry. Only strikes move slowly towards the upper and lower range of sold call options.
Gamma is negative in this strategy, which again indicates that any significant move in price on the higher side will lead to unlimited losses.
Long Call Ladder is a strategy that exposes a trader to uncapped losses. Maintaining a stop loss is strictly advised while trading. This strategy works best when the volatility in the market starts falling and the price of the underlying asset trades in the range-bound zone.
Frequently Asked Questions
How to manage risk in a Long call ladder?
A long call ladder is exposed to unlimited risk, and carrying any overnight position on the narrow price range of the underlying should be avoided.
How to build a Long Call Ladder Strategy?
It is created by buying an ITM option and selling two ATM/OTM and another OTM option, irrespective of the gaps between the strikes. All must be traded in equal quantities.
What are the advantages of the Long Call Ladder Options Strategy?
This strategy reduces the overall daily loss due to volatility which is evident in bull call spread. Narrows the lower breakeven point when compared to bull call spread.
What are the drawbacks of Long Call Ladder Options Strategy?
If the underlying rises above the breakeven, it will lead to unlimited loss. This strategy also requires a significant margin to be deposited while taking the trade.