What are the characteristics of this option strategy?
Call ladder strategies hold three call options at different strike prices with the same expiry, and can be built bullish or bearish depending on the trader outlook. Traders use the structure in an effort to generate income, manage risk, and capture price movement. Which side of the ladder you take decides the risk: the short call ladder shown in the example below has a defined maximum loss, while the long call ladder is net short one call and loses without limit if the stock keeps rallying.
Is this a bullish, bearish or neutral strategy?
The ladder option strategy can be created in bullish/bearish way as per trader’s outlook. It is executed by buying and selling OTM, ATM and ITM call options at different strike prices. The short call ladder profits if the stock falls below the lowest strike or rallies past the highest one, and loses in the middle; the long call ladder is the mirror of that and loses without limit on a large rally.
Is this a beginner or an advanced option strategy?
The ladder option strategy is classified as an advanced strategy due to its complexity. A trader must have an intimate understanding of the factors underlying an asset’s volatility in order to effectively employ the strategy.
In what situation will I use this strategy?
The ladder option strategy is best used when the trader is expecting a significant amount of price movement in the underlying asset. Traders who are expecting significant upward/downward movement or volatility in the underlying asset may use this strategy to take advantage of both the up and down changes in price.
Where does this strategy typically fall in the range of risk-reward and probability of profit?
Risk depends on which side of the ladder you take. The short call ladder (sell 1 ITM call, buy 1 ATM call, buy 1 OTM call) has defined risk. The long call ladder (buy 1 ITM call, sell 1 ATM call, sell 1 OTM call) is net short one call and carries unlimited risk if the stock rallies. The probability of profitability from this strategy can vary from moderate to high, depending on the trader’s ability to accurately identify volatility in the underlying asset.
How is this strategy affected by the greeks?
The delta, gamma and vega of a ladder option strategy are all important factors to consider when implementing the strategy. By managing the delta, gamma and vega of the options, a trader can effectively manage the risk of their position and maximize the chance of profitability.
In what volatility regime (i.e. VIX level) would this strategy be optimal?
The ladder strategy is ideally suited when the VIX index is at medium to high levels. By buying and selling calls at different strike prices in the same expiration, a trader can take advantage of high volatility in the underlying asset to generate a profit.
How do I adjust this strategy when the trade goes against me?
When the trade goes against a trader using the ladder option strategy, they can adjust the strategy by adjusting the delta, gamma and vega of the options in their portfolio. This can be done by either closing existing positions and opening new positions, or by buying and selling options to adjust the delta, gamma, and vega of their existing positions.
Where does this strategy typically fall in the range of commissions and fees?
The ladder option strategy generally carries a moderate to high cost of commissions and fees, depending on the specific broker used. Brokers typically charge commissions based on the number of trades placed, and also on the premiums paid for the option contracts.
Is this a good option income strategy?
The ladder can be run for income, but only the long call ladder is a net credit trade, and that is the version with unlimited loss above the highest strike. Any income taken from it is capped at the credit received while the risk above the ladder is not capped at all, so it is not a conservative income trade and should be sized accordingly.
How do I know when to exit this strategy?
When trading the ladder option strategy, traders should exit their trades on a predetermined set of conditions. Exiting trades should occur when the underlying asset is not expected to cross $240-$260 range, when the option contracts are close to expiration, or when the trader no longer wishes to maintain their position in the market.
How will market makers respond to this trade being opened?
When a trader opens a ladder option trade, market makers will respond to the trade by buying and selling option contracts to ensure that the bids and offers are in equilibrium. The market makers will typically adjust their offers to offset the exposures that the trader has in the market.
What is an example (with calculations) of this strategy?
For example, consider MSFT trading at a share price of $247.50. A trader might buy 1 call at $247.50 (ATM) and 1 call at $255 (OTM) and sell 1 call at $240 (ITM), all expiring in one week. That is the short call ladder. The premium received on the ITM call more than covers the cost of the ATM and OTM calls, here for a net credit of $2.51 per share, or $251 per contract. At or below $240 all three calls expire worthless and the trader keeps the full $251, which is the best the trade can do on the downside. The worst case is a close between $247.50 and $255, where the short $240 call is $7.50 in the money and neither long call has any offsetting value: the loss is $750 less the $251 credit, or $499. The breakevens are $242.51 on the downside and $259.99 on the upside, and above $259.99 the position is net long one call and gains with the stock, so there is no fixed maximum profit on the upside. The long call ladder is the mirror trade and reverses this profile: it takes in a larger credit, but it is net short one call and its loss above the highest strike is unlimited.
How can MarketXLS help?
MarketXLS is a great resource for traders wishing to employ the ladder option strategy. The MarketXLS allows traders to quickly analyze and adjust their ladder option strategy based on implied volatilities, time to expiration, and the movements of the underlying asset. MarketXLS also provides traders access to historical volatility data and an active options pricing calculator.
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Here are some templates that you can use to create your own models
](https://marketxls.com/marketxls-templates/307/laddered-call/)
Search for all Templates here: https://marketxls.com/templates/
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