To make a profit, traders use a variety of call options to trade in the market. A bear call spread is a sale of a call option at a lower price than its strike price in order to profit from the call option premium received. It benefits from the trader's pessimistic stock market prediction. The premium received by selling an option is always more than the premium paid to purchase a call.
Let us understand Call ladders by understanding the role of Ladders in the stock market.
The ladder is a term used in trading to describe an Option Strategy (call or put) that allows you to profit from one or more strike prices until they expire. It adjusts to account for the difference between the previous and new strike prices, allowing for more payoff flexibility. The trigger acts as a ceiling at work. It alerts you when the price of an asset surpasses a preset threshold, reducing risk by locking in a profit.
Now let us move toward what is bear call Ladder?
Bear Call Ladder Strategy:
Understanding market fluctuations and profiting from a Short Call Ladder Option Strategy takes practice and patience. You must only do this if you are confident that the market will move higher. Let's take a closer look at the bear call ladder approach to help you comprehend it better.
When investors' forecast for the stock index is moderately unfavorable, the underlying asset price is likely to fall, causing option sellers to sell their positions.
A three-legged bear call ladder is frequently used to realize 'net credit.'
It is supported by three legs:
1. Selling one call option that is in the money (ITM).
2. Purchasing a single ATM (At The Money) call option
3. Purchasing one out-of-the-money (OTM) call option
A bear call ladder provides unlimited rewards if the stock price increases above a given point, defined returns if the stock price falls and a loss if the stock price rises just enough to trigger a loss. A net credit technique it's also known as a short call ladder.
There are some tips you must keep in mind while executing a Bear Call Ladder Strategy
Choose options that provide more liquidity.
The open interest runs from 100 to 500, with 100 being the lowest and 500 being the highest.
The lower strike represents ITM.
The OTM, or medium strike, is one or two strikes above the OTM.
A higher strike, above the medium strike, is even more OTM.
Apart from the ones mentioned above, you should also check the following:
All the call options trading within the bear call ladder should have the same expiry.
They must be from the same underlying asset.
They must maintain the ratio (1:1:1/ 2:2:2 or 3:3:3)
Let us find out Bear Call Strategy with an example:
Let's say the Nifty spot is currently at 7790, and you believe it will rise to 8100 by the end of the expiry time. It is without a doubt a positive trend. Let's take a look at how to start a bear call ladder.
Step 1: Sell one ITM call option at 7600 CE and earn Rs.247 in premium.
Step 2: Purchase one ATM call option at the cost of Rs.117.
Step 3: Purchase one OTM call option at the cost of Rs.70.
The trade's net realized profit is 247 – 117-70 = 60.
This was a general example to make you understand how Bear Call Strategy works? In real-life trading, you may face more complex scenarios and may not judge whether the trade will lead you to a profit or loss.
Every coin has two sides; there are both advantages and disadvantages of the Bear Call Strategy also; Advantage is that you can get the profit from the potential upside movement, and the disadvantage can be the time factor.
So, we can generalize the whole concept of Bear call Ladder Strategy in the few points below; please remember, this is solely meant to share the information. The traders are requested to bear the risk on their own choices.
The Bear Call Ladder is a version of the Call Ratio Spread.
The cost of executing a bear-call ladder is always lower than the Call Ratio Spread, but the range above which the market must move grows as well.
Selling 1 ITM CE and buying 1 ATM CE, and then selling 1 OTM CE complete the Bear Call Ladder.
The Premium received from ITM CE – Premium paid to ATM & OTM CE = Net Credit
The Spread (difference between the ITM and ITM options) - Net Credit = Maximum Loss
At = ATM and OTM Strike, the maximum loss arises.
When the market falls, the reward is equal to Net Credit.
Lower Breakeven = Net Credit + Lower Strike
Long strike subtracted short strike minus net premium Equals Upper Breakeven.