Strategies...
- Buy lower strike Call (either ATM or slightly OTM)
- Sell Middle Strike Call (OTM) with the same expiration date.
- Sell Higher Strike Call (further OTM) with the same expiration date.
- Expect stock rise to middle strike price but not above the short higher strike price.
- Preferably shorter term to expiration
Example...
JPMorgan Chase & Co.(NYSE:JPM) is trading at $33.50 on May 26, 2012.
- Buy June 2012 $34 Call option for $1.00.
- Sell June 2012 $36 Call option for $0.35.
- Sell June 2012 $38 Call option for $0.10.
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| Bull Call Ladder |
How does Bull Call ladder work?
Stock price at $30...
- Buy June 2012 $34 Call = Call not exercise, $0
- Sell June 2012 $36 Call = Call not exercise, $0
- Sell June 2012 $38 Call = Call not exercise, $0
- Net premium paid: $1.0-$0.35-$0.10=$0.55
- Profit: -$0.55
Stock price at $34.55...
- Buy June 2012 $34 Call = Exercise call, gain $0.55
- Sell June 2012 $36 Call = Call not exercise, $0
- Sell June 2012 $38 Call = Call not exercise, $0
- Net premium paid: $1.0-$0.35-$0.10=$0.55
- Profit: $0.55-$0.55=$0
Maximum profit: Stock price between middle strike and higher strike ($36-$38), if stock price =$36
- Buy June 2012 $34 Call = Exercise call, gain $2
- Sell June 2012 $36 Call = Call not exercise, $0
- Sell June 2012 $38 Call = Call not exercise, $0
- Net premium paid: $1.0-$0.35-$0.10=$0.55
- Profit: $2-$0.55=$1.45
Stock Price at $39.45...
- Buy June 2012 $34 Call = Exercise call, gain $5.45
- Sell June 2012 $36 Call = Buyer exercise call, loss $3.45
- Sell June 2012 $38 Call = Buyer exercise call, loss $1.45
- Net premium paid: $1.0-$0.35-$0.10=$0.55
- Profit: $5.45-$3.45-$1.45-$0.55=$0
Stock price rise to $40...
- Buy June 2012 $34 Call = Exercise call, gain $6
- Sell June 2012 $36 Call = Buyer exercises call, loss $4
- Sell June 2012 $38 Call = Buyer exercises call, loss $2
- Net premium paid: $1.0-$0.35-$0.10=$0.55
- Profit: $6-$4-$2-$0.55=-$0.55
What if stock price rise to $100, your loss is -$60.55 (66-64-62-0.55). Maximum risk is uncapped cause you selling more calls than you're buying. The higher the stock price rise, the more money you lose.
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| Bull Call Ladder |
Advantages...
- Lower cost
- Gain money from wider stock price range ($34.55-$39.45)
- Uncapped risk if stock price rises
- Only for advanced trader
- Not clear if we have a bullish or bearish strategy.
Maximum Profit: $36-$34-$0.55=$1.45
(middle strike - lower strike - net premium paid)
Maximum Loss: UNLIMITED
Breakeven (Downside): $34+$0.55=$34.55
(Lower strike + net premium paid)
Breakeven (Upside): $38+$36-$34-$0.55=$39.45
(Higher strike + middle strike - lower strike - net premium paid)
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