Long Call Ladder – (Bull Call Ladder)

The Long Call Ladder, known also as Bull Call Ladder, is basically an options trading strategy that works as a type of Bull Call Spread with another sold call but at a more elevated strike. This strategy applies when the expectation of the rise in the value of the underlying asset is somewhat moderate but where the trader, at the same time, tries to hedge up against a high surge beyond this point.

Long Call Ladder – (Bull Call Ladder)


The Long Call Ladder Setup

For instance, if a stock is trading at $50. A trader going for a Long Call Ladder might do:

  1. Buy a call option with strike price of $50 for $5 premium
  2. Sell a call option with a strike price of $55 at $2 premium
  3. Sell another call option at a higher strike price of $60 at $1 premium.


Who Should Consider It

This strategy is suitable for those traders who are moderately bullish about a stock but at the same time want to hedge the cost of the long call and are willing to cap their maximum profit potential. This strategy is ideal for those who think the stock will rise but not significantly above the highest strike price of the calls sold.


Strategy Explained

By selling two calls, the seller reduces the net cost of going into the trade. This will not only help reduce the up-front cost, but also generate a higher return up to the second strike; however, any move above the highest strike has the potential of creating unlimited risks for the sold call, again similar to that of a naked call.


Breakeven Process

The breakeven point for a Long Call Ladder is not directly understood, but rather it requires careful computation based on the paid and received premiums. It usually occurs at a point where the cost of a long call is compensated by income realized from selling calls.


Becoming A Sweet Spot

This position maximizes the effectiveness of the spread between the bought call and the first sold call, and keeps the second sold call out of the money, meaning that it would be worthless at expiration.

This is the sweet spot for this strategy, located exactly at the strike price of the second call sold, at $55.


Max Profit Potential

The maximum profit for the Long Call Ladder is limited to the event wherein the stock price is exactly on the strike of the second call sold at expiry. The amount of profit in this case, therefore, represents the difference of the strike between the long call and the short first call while adding or deducting the nets of the premium.


Max Loss

The maximum loss is capped on the downside to the net cost of the spread, namely premiums paid less premiums received. On the upside, loss theoretically unlimited if the stock price rockets well above the highest strike price of calls sold.


Risk

The downside risk is limited to the net premium paid. The primary risk is if the stock price significantly exceeds the highest strike price; with each higher stock price, the loss grows dollar-for-dollar due to the additional short call.


Time Decay

Time decay (theta) tends to work in favor of this strategy as long as the stock price remains between the lower strike and the first higher strike price, for the premium on the short calls will decay. As expiration draws near, however, time decay can work against the position if the stock is near or above the highest strike price.


Implied Volatility

The impact of changes in implied volatility can be mixed for this strategy. The increase in volatility may cause an increase in the value of the long call, which will have a higher increase than that of the short calls, thereby increasing the position. A decrease in volatility will typically harm the position by causing the premium value to decrease faster.


Conclusion

The Long Call Ladder is generally a cost-effective strategy that has to be taken with a bullish position. It has balanced both capped profit potential and significant risk in case the underlying stock surges beyond its anticipated levels.