Professional Documents
Culture Documents
options trading that is employed when the options trader thinks that the underlying security will experience little volatility in the near term. To setup the long call ladder, the options trader purchases an in-the-money call, sells an at-the-money call and sells another higher strike out-of-themoney call of the same underlying security and expiration date. Long Call Ladder Construction
Long Call Ladder Payoff Diagram Limited Downside Risk, Unlimited Risk to the Upside
Losses is limited to the initial debit taken if the stock price drops below the lower breakeven point but large unlimited losses can be suffered should the stock price makes a dramatic move to the upside beyond the upper breakeven point. The formula for calculating loss is given below: Maximum Loss = Unlimited Loss Occurs When Price of Underlying > Total Strike Prices of Short Calls - Strike Price of Long Call Net Premium Paid Loss = Price of Underlying - Upper Breakeven Price + Commissions Paid Breakeven Point(s)
There are 2 break-even points for the long call ladder position. The breakeven points can be calculated using the following formulae. Upper Breakeven Point = Total Strike Prices of Short Calls - Strike Price of Long Call - Net Premium Paid Lower Breakeven Point = Strike Price of Long Call + Net Premium Paid Example
Suppose XYZ stock is trading at $35 in June. An options trader executes a long call ladder strategy by buying a JUL 30 call for $600, selling a JUL 35 call for $200 and a JUL 40 call for $100. The net debit required for entering this trade is $300. Let's say XYZ stock remains at $35 on expiration date. At this price, only the long JUL 30 call will expire in the money with an intrinsic value of $500. Taking into account the initial debit of $300, selling this call to close the position will give the trader a $200 profit - which is also his maximum possible profit. In the event that XYZ stock rallies and is trading at $50 on expiration in July, all the call options will expire in the money. The short JUL 35 call will expire with $1500 in intrinsic value while the short JUL 40 call will expire with $1000 in intrinsic value. Selling the long JUL 30 call will only give the options trader $2000 so he still have to top up another $500 to close the position. Together with the initial debit of $300, his total loss comes to $800. The loss could have been worse if the stock had rallied beyond $50. However, if the stock price had dropped to $30 instead, all the calls will expire worthless and his loss will be the initial $300 debit taken to enter the trade.
The short call ladder, or bear call ladder, is an unlimited profit, limited risk strategy in options trading that is employed when the options trader thinks that the underlying security will experience significant volatility in the near term.
Short Call Ladder Construction Sell 1 ITM Call Buy 1 ATM Call Buy 1 OTM Call
To setup the short call ladder, the options trader sells an in-the-money call, purchases an at-themoney call and purchases another higher strike out-of-the-money call of the same underlying security and expiration date. Limited Downside, Unlimited Upside Profit Potential
Maximum gain for the short call ladder strategy is limited if the underlying stock price goes down. In this scenario, maximum profit is limited to the initial credit received since all the long and short calls will expire worthless. However, if the underlying stock price rallies explosively, potential profit is unlimited due to the extra long call. The formula for calculating profit is given below: Maximum Profit = Unlimited Profit Achieved When Price of Underlying > Total Strike Prices of Long Calls - Strike Price of Short Call + Net Premium Received Profit = Price of Underlying - Upper Breakeven
Losses are limited when employing the short call ladder strategy and maximum loss occurs when the stock price is between the strike prices of the two long calls on expiration date. At this price, the higher striking long call expires worthless while the lower striking long call is worth much less than the short call, thus resulting in a loss. The formula for calculating maximum loss is given below: Max Loss = Strike Price of Lower Strike Long Call - Strike Price of Short Call - Net Premium Received + Commissions Paid Max Loss Occurs When Price of Underlying is in between the Strike Prices of the 2 Long Calls Breakeven Point(s)
There are 2 break-even points for the short call ladder position. The breakeven points can be calculated using the following formulae. Upper Breakeven Point = Total Strike Prices of Long Calls - Strike Price of Short Call + Net Premium Received Lower Breakeven Point = Strike Price of Short Call - Net Premium Received Example
Suppose XYZ stock is trading at $35 in June. An options trader executes a short call ladder strategy by selling a JUL 30 call for $600, buying a JUL 35 call for $200 and a JUL 40 call for $100. The net credit received for entering this trade is $300. In the event that XYZ stock rallies and is trading at $50 on expiration in July, all the call options will expire in the money. The long JUL 35 call will expire with $1500 in intrinsic value while the long JUL 40 call will expire with $1000 in intrinsic value. Buying back the short JUL 30 call will only cost the options trader $2000. So selling the long calls and buying back the short call will leave the trader with a $500 gain. Together with the initial credit of $300, his total profit comes to $800. This profit can be even higher if the stock had rallied beyond $50. However, if the stock price had dropped to $30 instead, all the calls will expire worthless and his profit will only be the initial credit of $300 received. On the other hand, let's say XYZ stock remains at $35 on expiration date. At this price, only the short JUL 30 call will expire in the money with an intrinsic value of $500. Taking into account the initial credit of $300, buying back this call to close the position will leave the trader with a $200 loss - this is also his maximum possible loss.
Max Profit = Strike Price of Long Put - Strike Price of Higher Strike Short Put - Net Premium Paid Commissions PaidMax Profit Achieved When Price of Underlying is in between the Strike Prices of
the 2 Short Puts Long Put Ladder Payoff Diagram Limited Upside Risk, Unlimited Risk to the Downside
Losses is limited to the initial debit taken if the stock price rallies above the upper breakeven point but large unlimited losses can be suffered should the stock price makes a dramatic move to the downside below the lower breakeven point. The formula for calculating loss is given below: Maximum Loss = Unlimited Loss Occurs When Price of Underlying < Total Strike Prices of Short Puts - Strike Price of Long Put + Net Premium Paid Loss = Lower Breakeven - Price of Underlying + Commissions Paid Breakeven Point(s)
There are 2 break-even points for the long put ladder position. The breakeven points can be calculated using the following formulae. Upper Breakeven Point = Strike Price of Long Put - Net Premium Paid Lower Breakeven Point = Total Strike Prices of Short Puts - Strike Price of Long Put + Net Premium Paid
Example Suppose XYZ stock is trading at $40 in June. An options trader executes a long put ladder strategy by buying a JUL 45 put for $600, selling a JUL 40 put for $200 and a JUL 35 put for $100. The net debit required for entering this trade is $300. Let's say XYZ stock remains at $40 on expiration date. At this price, only the long JUL 45 put will expire in the money with an intrinsic value of $500. Taking into account the initial debit of $300, selling this put to close the position will give the trader a $200 profit - which is also his maximum possible profit. In the event that XYZ stock rallies and is trading at $45 on expiration in July, all the puts will expire worthless and the trader's loss will be the initial $300 debit taken to enter the trade. However, if the stock price had dropped to $25 instead, all the put options will expire in the money. The short JUL 40 put will expire with $1500 in intrinsic value while the short JUL 35 put will expire with $1000 in intrinsic value. Selling the long JUL 45 put will only give the options trader $2000 so he still have to top up another $500 to close the position. Together with the initial debit of $300, his total loss comes to $800. This loss could have been worse if the stock had dived below $25.
The short put ladder, or bull put ladder, is a unlimited profit, limited risk strategy in options trading that is employed when the options trader thinks that the underlying security will experience significant volatility in the near term. Short Put Ladder Construction Sell 1 ITM Put Buy 1 ATM Put Buy 1 OTM Put To setup the short put ladder, the options trader sells an in-the-money put, buys an at-the-money put and buys another lower strike out-of-the-money put of the same underlying security and expiration date. Unlimited Downside, Limited Upside Profit Potential
Maximum gain is limited to the initial credit received if the stock price rallies above the upper breakeven point but large unlimited profit can be achieved should the stock price makes a dramatic move to the downside below the lower breakeven point. The formula for calculating profit is given below: Maximum Profit = Unlimited Profit Achieved When Price of Underlying < Total Strike Prices of Long Puts - Strike Price of Short Put + Net Premium Received Profit = Lower Breakeven - Price of Underlying
Maximum loss for the short put ladder strategy is limited and occurs when the underlying stock price on expiration date is trading between the strike prices of the put options bought. At this price, while both the short put and the higher strike long put expire in the money, the short put is worth more than the long put, resulting in a loss. The loss can be calculated using the formula below. The formula for calculating maximum loss is given below: Max Loss = Strike Price of Short Put - Strike Price of Higher Strike Long Put - Net Premium Received + Commissions Paid Max Loss Occurs When Price of Underlying is in between the Strike Prices of the 2 Long Puts Breakeven Point(s)
There are 2 break-even points for the short put ladder position. The breakeven points can be calculated using the following formulae. Upper Breakeven Point = Strike Price of Short Put - Net Premium Received Lower Breakeven Point = Total Strike Prices of Long Puts - Strike Price of Short Put + Net Premium Received Example
Suppose XYZ stock is trading at $40 in June. An options trader executes a short put ladder strategy by sellng a JUL 45 put for $600, buying a JUL 40 put for $200 and a JUL 35 put for $100. The net credit received for entering this trade is $300. Let's say XYZ stock remains at $40 on expiration date. At this price, only the short JUL 45 put will expire in the money with an intrinsic value of $500. Taking into account the initial credit of $300, buying back this put to close the position will leave the trader with a $200 loss - which is also his maximum possible loss. In the event that XYZ stock rallies and is trading at $45 on expiration in July, all the puts will expire worthless and the trader's profit will be the initial $300 credit received when entering the trade. However, if the stock price had dropped to $25 instead, all the put options will expire in the money. The long JUL 40 put will expire with $1500 in intrinsic value while the long JUL 35 put will expire with $1000 in intrinsic value. Buying back the short JUL 45 put will only cost the options trader $2000 so he still have a gain of $500 when closing the position. Together with the initial credit of $300, his total profit comes to $800. This profit could have been greater if the stock had dived below $25.