HOME ABOUT ARCHIVES MASTERCLASS BLOG SUBSCRIBE   SIGN IN

Bullish Patterns
Long Calls
Bull Call Spread
Bull Put Spread
Call Backspread
Long Call Ratio Spread
Naked Put
Synthetic Long Stock
The Collar
Covered Calls
Synthetic Long Call
Synthetic Short Put
Covered Straddle
Covered Strangle
Married Put
Protective Put

Bearish Patterns
Long Puts
Bear Put Spread
Bear Call Spread
Put Backspread
Long Put Ratio Spread
Naked Calls
Synthetic Short Stock
Synthetic Short Stock (split strikes)
Covered Put
Protective Call
Synthetic Short Call
Synthetic Long Put

Long Volatility
Long Straddle
Long Strangle
Short Call Butterfly
Short Put Butterfly
Short Iron Butterfly
Short Call Condor
Short Put Condor
Short Iron Condor
Long Guts
Strip
Strap
Short Call Ladder
Short Put Ladder
Long Call Synthetic Straddle
Long Put Synthetic Straddle

Short Volatility
Short Straddle
Short Strangle
Long Call Butterfly
Long Put Butterfly
Long Iron Butterfly
Long Call Condor
Long Put Condor
Long Iron Condor
Short Guts
Long Call Ladder
Long Put Ladder
Call Ratio Spread
Short Call Ratio Spread
Put Ratio Spread
Short Put Ratio Spread
Ratio Call Write
Ratio Put Write
Short Call Synthetic Straddle
Short Put Synthetic Straddle
Variable Ratio Write

print this page
send to a friend

Short Call Ladder

Risk: limited
Reward: unlimited

General Description
Entering a short call ladder entails selling (1) lower strike call, buying (1) middle strike call and buying (1) higher strike call (same expiration month). It's essentially a bear call spread with an additional long call at a higher strike.

(draw a short call ladder risk diagram here)

The Thinking
Your analysis tells you a big move is coming, and you favor the upside. You enter a bear call spread, which has limited profit potential to the downside, and then buy an extra call that has unlimited profit potential to the upside. If the stock drops below the lowest strike, you'll profit (the gain from the bear call spread will be greater than the loss from the long call). But ideally the stock will rally big time, and your profit from the long call more than makes up for the loss of the bear call spread.

Example

XYZ is at $55. Your research says a big move is coming, but you favor the upside because the overall market is moving in that direction. You enter a bear call spread by selling (1) 50 call for $7.00 and buying (1) 55 call for $3.50. Then you buy (1) 60 call for $1.00. The entire trade is initiated for a net credit of $2.50

Below $50 (the lowest strike), all calls expire worthless, and your profit is the net credit received when the trade was initiated.

Above $60 (the highest strike), all calls expire in-the-money. The profit from one of your long calls will be canceled out by the loss from your short call, and then the remaining long call will increase in value point-for-point with the stock. For example, at $65, the 50 call will be worth $15 ($8.00 loss), the 55 call will be worth $10 ($6.50 profit) and the 60 call will be worth $5.00 ($4.00 profit). The net is a $2.50 profit.

Between the two higher strikes ($55 and $60), the max loss is suffered. That’s where the profit from the short call won’t be enough to offset the loss from the long calls. For example, at $55, the 50 call will be worth $5.00 ($2.00 profit), and both long calls will expire worthless ($3.50 loss on the 55, $1.00 loss on the 60). The net of this is a $2.50 loss.

The PL chart below graphically shows where this trade will be profitable and at a loss.