What Is A Bear Call Ladder Option Strategy?2 min readReading Time: 2 minutes
A bear call ladder offers unbounded returns if the stock price rises beyond a certain point and defined returns if the stock price falls while offering a loss if stock price just rises enough to trigger a loss. It is also called a short call ladder and is a net credit strategy. It employs a three legged trading framework engaging in three option transactions given below.
- sell one ITM call,
- buy one ATM call, and
- buy one OTM call – all with the same expiry and underlying.
1. What is the Right Time to put on a Bear Call Ladder Trade?
The trading view is to make capital gain while minimizing the maximum risk. It is wise to put on this trade when you are expecting significant move in the underlying, especially on the upside. It is a limited risk and unlimited profit strategy if the underlying moves on the upper side.
Let us go through an example to understand this well.
Let us assume that Nifty is trading at 16500.
Also, the 16300 CE strike price is trading @ INR 250 and we sell 1 lot.
16500 CE strike price is trading @ INR 80 and we buy 1 lot.
16600 CE strike price is trading @ INR. 40 and we buy 1 lot.
And let the lot size be 50.
Net credit = 130 points (250 – 80 – 40 = 130)
=130 X 50 (lot size) = INR 6500
What is the Maximum Loss?
Maximum loss is the difference between the ITM strike and ATM strike and occurs when the price stays between the ATM strike and OTM strike.
For the example discussed above, max loss = 70 points [16500 (ATM) – 16300 (ITM) = 200 -130 (Net credit) =70]
= 70X 50 (lot size) = INR 3,500
What is the Maximum Profit?
The maximum profit is infinite as the upside potential once the underlying price crosses a specific price point is unbounded on the upside.
2. What is the Advantage of this Strategy?
One can get exposure to the upside potential of the stock while limiting the downside risk.
3. What is the Disadvantage of this Strategy?
Time decay can be harmful for the payoff when underlying price is between ITM strike and ATM strike.
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