Options Trading Strategies: Short Call Ladder
The short call ladder (otherwise called a bear call ladder) is a three-legged strategy, created by selling one In The Money call, buying one At The Money call, and buying one more Out of The Money call, all with the same expiration date.
The short call ladder is an extension to the bear call spread with additional long OTM call.
When to use this strategy?
You are bullish and looking for a capital gain strategy with reduced risk.
Below is a Profit and Loss chart example of a short call ladder options strategy:
Pros:
Uncapped maximum profit and capped maximum risk.
Cons:
Depending on the option prices of the selected strikes and a selected expiration date, you can end up with a net debit trade.
Example:
In this example, BTC is trading at 37,082.84 USD. You have sold an ITM call with a strike price of 35,000.00USD, bought an ATM call with a strike price of 37,000.00 USD, and bought an OTM call with a strike price of 39,000.00 USD, all with an expiration date of February 4th 2022. As this is a net credit trade, you have received a net premium of 1,599.14 USD.
The Profit and Loss chart is given below:
Upon expiration:
If the BTC price is at or below the ITM short call strike price, all calls expire worthless and your profit is equal to the initial net premium received.
If the BTC price is at or above the ITM short call strike and below the long ATM strike price, you are in profit as long as the bitcoin price is below the first break-even price.
If the BTC price is at or between the ATM long call and OTM long call strike prices, only the short call will be assigned. This is also your maximum loss which is equal to the difference between strikes minus the net premium.
If the BTC price is above the OTM long call strike price, all call options will be assigned, so you are in the profit as long as the bitcoin price is above the second break-even price, and you can realize potentially unlimited profit.
| BTC at Expiry (USD) | Payoff (USD) |
|---|---|
| 35,000.00 (SC ITM) | +1,599.14 |
| 35,935.00 | +664.14 |
| 36,599.14 (break even 1) | 0 |
| 36,768.00 | -168.86 |
| 37,000.00 & 39,000.00 (LC ATM x LC OTM) | -400.86 (max loss is between strikes) |
| 39,215.00 | -185.86 |
| 39,400.86 (break even 2) | 0 |
| 40,027.00 | +626.14 |
| 41,504.00 | +2,103.14 |