Bull Call Ladder

The Bull Call Ladder Setup

For instance, take stock XYZ trading at $50. You might do the following to establish a Bull Call Ladder:

• Buy one in-the-money call option with a strike price of $45 for $7.
• Sell one at-the-money call option with a strike price of $50 for $4.
• Sell another out-of-the-money call option with a strike price of $55 for $2.

This setup has an initial net cost (net debit) that’s less than a simple bull call spread because the additional premium from selling the second higher-strike call option is received.

Who Should Consider It

It’s best suited for individuals who are bullish on a stock but believe there is a possibility of the stock going much higher than their highest strike price. It’s perfect for someone hoping to ride the moderate price rise while entering a bullish position at an estimated cost.

Strategy Explained

The Bull Call Ladder is an attempt to catch a move up in the underlying stock to the highest strike of the call options sold but comes with additional risk if the stock price moves far above the highest strike. A second short call opens the trader up to potentially unlimited losses as the stock price moves higher and higher.

Breakeven Process

The breakeven point for this strategy can become relatively complicated depending on the different strike prices involved. Generally speaking, it is computed by adding the net debit to the strike price of the long call.

Sweet Spot

The ideal scenario for this strategy is when the stock price at expiration is at or slightly above the strike price of the highest sold call. This maximizes the gains from the long call and the premiums collected from the sold calls.

Max Profit Potential

The maximum profit is capped up to the strike price of the highest sold call option. It occurs when the stock price equals the strike price of the highest call sold.

Max Loss

The loss is capped on the downside by the net debit paid to enter the spread. On the upside, though, because of the additional sold call, the risk becomes unlimited if the stock price shoots up above the highest call strike price.

Risk

The Bull Call Ladder significantly adds risk in case the stock price unexpectedly shoots above the highest strike price of the sold calls. This risk arises from the extra short call that leaves the trader vulnerable to potentially unlimited losses if the stock rallies hard.

Time Decay

Time decay (Theta) generally works against the long call and for the short calls. As the expiration date draws near, if the stock price is below the lower strike price, the time decay will erode the value of the long call more than it benefits the short calls, potentially leading to a loss.

Implied Volatility

The change in implied volatility can be both positive and negative for this strategy. While the increase in volatility will push the value of the long call option higher, it increases the risk on the short call options and can lead to bigger losses if the stock price shoots up sharply.

Conclusion

The Bull Call Ladder is a more advanced strategy that encompasses elements of both risk management with the potential to make money during a rising market. It will provide more flexibility than a bull call spread, but it includes added risks should the underlying stock price rise too high above a predicted level. This strategy will be best employed by those having a clear understanding of options risks and advanced trading strategies.