In this post we will discuss options strategies that is Bear Call Ladder, It is very helfull for Options Seller, There are several other strategies like Bull Call Spread, Bull Put Spread, Call Ratio Back Spread and so on. So let’s start.
By trading in Options either stock Option or Index option you can earn money by two ways either by buying the options or writing the options, but in the post we will mostly focus on top Options writing strategies.
Bear Call Ladder Option Strategy
As we discussed in previous article about Call ratio back spread option strategies, Bear call ladder is the improved version of call ratio back spread option strategy. This strategy will also get unlimited profit if the market goes up.
This is also a 3 leg strategy where we will short one ITM (in the money) call option and then buy 1 ATM (at the money) call option and one OTM (out of the money) call option. Where as in call ratio back spread we buy two out of the money call option.
This classic bear call ladder setup executes at 1:1:1. You can execute it with ratio like (1:1:1 or 2:2:2 or 3:3:3 and so on).
Implementation:
Buy one lot of ATM (at the money) call options
Buy one lot of OTM (out of the money) call options
Sell one lot of ITM (in the money) Call Options
Conditions: All these options belongs to same expiry, same underlying and ratio is maintained.
Example:
Suppose Bank Nifty spot price is 41575, We have bought 1 OTM (Out of the money) call option of 41700 at the price of 75, one ATM (at the money) call option of 41600 at 170 and shorted one ITM (in the money) call option of 41400 at the price of 270.
Now we will check different scenario
If Bank Nifty expires at the level of 41400
The intrinsic value for the call 41400 would be 0, therefore we will get all the premium of 270
The intrinsic value for the call 41600 would be 0 and we will lose our premium.
The intrinsic value for the call 41700 would also be 0 and we will lose our premium.
Therefore the profit would be= 270-170-75=25 (This would also be the net credit)
If Bank Nifty expires at the level of 41200
The intrinsic value for the call 41400 would be 0, therefore we will get all the premium of 270
The intrinsic value for the call 41600 would be 0 and we will lose our premium.
The intrinsic value for the call 41700 would also be 0 and we will lose our premium.
Therefore the profit would be= 270-170-75=25
If Bank Nifty expires at the level of 41700
The intrinsic value for the call 41400 would be 300, and we have shorted the option.
Therefore payoff would be= 270-300=-30
The intrinsic value for the call 41600 would be 100 and we have paid the premium of 170
So payoff would be = 100-170=-70
The intrinsic value for the call 41700 would also be 0 and we will lose our premium.
Therefore the total loss would be= -30-70-75=-175
If Bank Nifty expires at the level of 42000
The intrinsic value for the call 41400 would be 600, and we have shorted the option.
Therefore payoff would be= 270-600=-330
The intrinsic value for the call 41600 would be 400 and we have paid the premium of 170
So payoff would be = 400-170=-230
The intrinsic value for the call 41700 would be 300 and we have paid the premium of 75
.Therefore payoff would be = 300-75=-225
Hence our total profit would be = 230+225-330=125
Conclusion:
Spread = ITM Strike – ATM Strike
Net Credit=Premium received from ITM call- premium paid for ATM and OTM strike price
Max loss= Spread (Diff of ITM and ATM) – net credit
Maximum loss would be at = ATM and OTM Strike
When market goes down payoff would be= Net Credit
Upper Breakeven= Sum of long strike – short strike- net premium
Nirmal is a NISM Certified Derivative Trader & the Founder of InvestandEarn.net (Financial Blog). He entered the world of Equity research to explore his interests in financial markets having 5+ Years of Experience in Share Market Trading & Investing. Nirmal frequently writes about Share Market Trading & Investment and publishes his personal view on the market. Drop him a mail at nirmal.jaysval@investandearn.net.
