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Bull Call Ladder

 

Description

                  

The Bull Call Ladder is an extension to the Bull Call Spread. By shorting another call at a higher strike price, the position assumes uncapped risk potential if the stock soars upwards. The problem is that now its not totally clear if we have a bullish or bearish strategy, so we have to designate it as a direction neutral strategy! Wed love the stock to rise to the middle strike price (the first Short Call) but not above the higher short call strike price. Anywhere in between the middle and higher strike is ideal.

 

Because of the dangers of uncapped risk, this strategy becomes more appropriate for a short-term income trade. The net effect of the higher short strike is to reduce the cost and break even of the Bull Call Spread and adjust the directional nature of the trade. The higher call strike prices are further OTM and will therefore have lower premiums than the lower strike bought call.

 

So, in summary, if the stock falls below the lower (buy) strike, you can make a loss;if the stock rises to anywhere between the middle and upper (short) strikes, you make your maximum profit; if the stock rises above the highest strike, then you can make unlimited losses. The extra leg also ensures that you may have two break even points.

 

Market Opinion

 

Neutral.

 

P/L

 

 

 

 

 

 

 

When To Use

 

Use this strategy when you want to increase income in a neutral to slightly bullish environment and you think the stock will experience limited volatility in the short term.

 

Example

 

XXXX is trading at $26.10 on May 11, 2011.

Buy June 2011 25 strike call for $1.60.

Sell June 2011 $27.50 strike call for $0.20.

Sell June 2011 30 strike call for $0.10.

 

Benefit

 

The benefit of doing this trade is that it costs less than a Bull Call Spread.

 

Risk vs. Reward

 

The risk of this strategy is uncapped since you sold more calls then you bought. The reward is the difference between the lower and middle strike prices less your net debit or plus your net credit.

 

Net Upside

 

The lower strike sold calls cap the upside.

 

Net Downside

 

Uncapped downside.

 

Break Even Point

 

Break even up: higher strike minus lower strike minus net debit.

 

Break even down: lower strike plus net debit

 

Effect Of Volatility

 

Minimal to low effect.

 

Effect Of Time Decay

 

Negative. At the lower strike price has a negative effect.

 

Alternatives Before Expiration

 

In the event that the stock drops under the stop loss, sell the long call or close out the entire position.

 

Alternatives After Expiration

 

Close out the position by buying back the calls sold and selling the calls bought.

 

 
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