There is no dearth of bullish options trading strategies for F&O traders. However, not all bullish strategies are suited to all bullish markets. Some strategies may work better when you expect a large upward price swing in the underlying asset, while others may be better suited to a less dramatic price upswing.
The bull call ladder strategy can help you in the latter case. It can be a fairly effective strategy for a slightly bullish underlying asset. In this article, we take a closer look at how to set up this strategy, what its potential outcomes are and how an options strategy builder like Samco’s Options B.R.O. can help build, research and optimise this strategy.
The Bull Call Ladder: An Overview
The bull call ladder is one step more than the typical bull call spread, where you purchase an in-the-money (ITM) call option and sell an out-of-the-money (OTM) call option. By adding a third transaction to this spread, the bull call ladder reduces the total cost of initiating the trading position.
You can implement this strategy manually or make it faster and more effective by using an options strategy builder to capitalise on the minor upward price movement of the underlying asset. However, keep in mind that this strategy may not be as effective if the underlying asset is expected to move significantly.
Setting up the Bull Call Ladder
Setting up the bull call ladder manually or using an options strategy builder involves the following three trades:
- Purchase an ITM Call Option
This trade hinges on the expectation that the asset’s price may rise by a small amount. So, you purchase an in-the-money (ITM) call option — with its strike price lower than the asset’s current price. If the asset’s price rises as expected, this trade will become profitable.
- Sell Two OTM Call Options
These two trades are executed primarily to offset the cost of buying the ITM call option. While both the short calls are out-of-the-money options, the strike price of one should be higher than the strike price of the other. This helps create a reasonable spread.
A modified version of this setup involves buying ATM call options instead. If you do this, you need to choose the strikes for the two short calls more conservatively, so the premiums can help reduce the overall cost. You could sell one call at the price that you think the underlying asset may touch but not exceed. And you could sell the other call at the strike price that’s the next highest in the options chain.
Key Formulas in the Bull Call Ladder
Irrespective of how the market moves, you can get a better idea of the possible outcomes if you know the formulas used to compute the maximum profit, maximum loss and the break-even points for the bull call ladder. So, check out these details below before you use an options strategy builder like Samco’s Options B.R.O. to execute this trade.
- Cost of the Trade
The total cost of the trade is the net of the premium paid for the long call and the premiums received for the two short calls. Depending on the strike prices chosen, these premiums may result in a net debit or a net credit.
If the total premium received from the short calls is higher than the cost of the long call, you will end up with a net credit. On the other hand, if the premium from the calls written is not high enough to match the cost of the long call, you will have a net debit.
- Maximum Gain or Profit
The formula for the maximum gain from the bull call ladder strategy is as follows:
Maximum Gain = Middle Short Call Strike Price — Lower Long Call Strike Price — Net Premium Paid
This strategy can attain peak profitability if the underlying asset’s price is between the middle and the higher sold strike prices on expiry. Such an outcome is aligned with the moderately bullish expectation that triggered this strategy in the first place.
- Maximum Loss or Risk
This strategy could lead to losses in two scenarios — firstly if the asset price falls below the long call’s strike price and secondly, if the asset price rises dramatically past the higher short call’s strike price. Let us see what the loss in each of these scenarios will be.
If the first scenario occurs, the maximum loss is the net premium paid. In the second scenario, the maximum loss is infinite.
- Break-Even Point
The bull call ladder strategy has an upper and a lower break-even point where the setup leads to a no-profit and no-loss outcome. The formulas for these break-even points are as follows:
Upside Break-Even Point:
= Highest Short Call Strike Price + Middle Short Call Strike Price — Lower Long Call Strike Price — Net Premium Paid
Downside Break-Even Point:
= Long Call Strike Price + Net Premium Paid
Before you implement this strategy, you need to be aware of the break-even points as well as the maximum profit and loss, the potential for profit and other nuances of the bull call ladder. Calculating these metrics manually can be both time-consuming and prone to errors. However, with the options strategy builder from Samco Securities, you can easily analyse all these parameters and make an informed trading decision within seconds.
An Example of the Bull Call Ladder Strategy
Now that you have seen how the bull call ladder works and what the key formulas involved are, let us discuss a hypothetical example of this trade and its outcome in different scenarios.
Say a stock is currently valued at Rs. 22,400. You expect that this stock will rise within the next few days, but not by a large amount. So, you decide to implement the bull call ladder strategy and execute the following trades:
- Buy an ITM call with a strike of Rs. 22,350 by paying a premium of Rs. 200
- Sell one OTM call with a middle strike of Rs. 22,500 for a premium of Rs. 120
- Sell another further OTM call with a higher strike of Rs. 22,800 for a premium of Rs. 30
The total cost of setting up this trade is the net premium paid, which is Rs. 50 (200 — 120 — 30). Now, let us see how you may profit or lose from this trade based on the stock price movements at expiry.
- Scenario 1: Stock Rises Slightly at Expiry
Suppose the stock reaches Rs. 22,600 at expiry. In that case, the long ITM call with a strike of Rs. 22,350 will be profitable. The profit from this call option will be:
Profit:
= Rs. (22,600 — 22,350) — Premium Paid
= Rs. 250 — Rs. 200
= Rs. 50
The middle strike call option with a strike of Rs. 22,500 will result in an absolute loss for you since you have sold the option. The loss from this trade, adjusted for the premium received, will be:
Profit/Loss:
= Premium Received — Rs. (22,600 — 22,500)
= Rs. 120 — Rs. 100
= Rs. 20
The further OTM sold call with a strike price of Rs. 22,800 will expire worthless, leaving you with a profit of Rs. 30 from the premium received.
So, the net profit from this trade will be Rs. 100 (i.e. Rs. 50 + Rs. 20 + Rs. 30). This also aligns with the maximum gain formula discussed earlier in the article.
- Scenario 2: Stock at Expiry is Below the Lower Strike
If the stock expires at a price below the lower strike, say at Rs. 22,300, all three options expire worthless. So, the net premium paid (i.e. Rs. 50) will be the maximum loss from the trade setup.
- Scenario 3: Stock at Expiry is Above the Higher Sold Option’s Strike
Now, say the stock rises as expected, but the rise is substantial and not as moderate as you anticipated it to be. For instance, assume the stock price at expiry is Rs. 22,920. In this case, let us discuss the outcomes of each of the three trades in the bull call ladder strategy.
The long ITM call with a strike of Rs. 22,350 will be profitable. The profit from this call option will be:
Profit:
= Rs. (22,920 — 22,350) — Premium Paid
= Rs. 570 — Rs. 200
= Rs. 370
The middle strike call option with a strike of Rs. 22,500 will also be profitable for the options buyer but will result in an absolute loss for you since you have sold the option. The loss from this trade, adjusted for the premium received, will be:
Profit/Loss:
= Premium Received — Rs. (22,920 — 22,500)
= Rs. 120 — Rs. 420
= — Rs. 300 (loss)
The further OTM sold call with a strike price of Rs. 22,800 will also result in an absolute loss for you. When calculated and adjusted for the premium received, the outcome is as follows:
Profit/Loss:
= Premium Received — Rs. (22,920 — 22,800)
= Rs. 30 — Rs. 120
= — Rs. 90 (loss)
So, the net outcome from this trade in this scenario will be a loss of Rs. 20.
Conclusion
This sums up our handy guide on the bull call ladder strategy. If you expect an asset’s price to increase by expiry but do not anticipate a large upswing, this could be one of the most effective strategies to implement in that scenario. Although it is fairly easy to understand, implementing this strategy can be challenging because of the multiple trades involved.
Options B.R.O, a pioneering options strategy builder from Samco Securities, can make it easier for you to execute this strategy in a low-volatile bullish market. You can input your market views along with other required details in the Samco trading app, identify the bull call ladder among the strategies suggested, and analyse this strategy across different parameters — like the probability of profit, the maximum profit and loss and the risk and reward involved.
You can then implement the strategy from the options strategy builder in the Samco trading app itself, thanks to the one-click execution feature. This way, you can make the most of the current bullish sentiment prevailing in the market.
