3 Things To Know About Bear Call Ladder Strategy

July 6, 2022

Bear Call Ladder

Futures and options traders use various call options to make a profit. A Bear Call Ladder happens when the call option is sold off at a lower price as compared to the strike price to earn profit from the option premium received for the call option sold.

This makes a profit from the bearish market. The sell option premium is always higher as compared to the premium paid for buying the call.

What Is A Ladder In Trading?

From the F&O trading perspective, a ladder is an option contract (put or call) that aims to earn profit from either one or more strike prices until the option expires. In this strategy, the Bear Call Ladder is one of the most used ones.

This basically tunes in with the gap between new and old strike prices to permit more flexibility in the payoff. 

Trigger strikes function just like a ceiling. This allows you to know when the asset price approaches the trigger feature, which lowers risk by locking the profit.

What Is A Bear Call Ladder Strategy?

This might sound confusing; however, the bear call ladder tactic is implemented during bullish market conditions. Also, it is known as the ‘short call ladder’ as purchasing new call options is funded by selling another ITM (in the money) call option. 

However, to execute the ladder, you should make sure that both the call options have the same expiry dates, and underlying assets and maintain the ratio. F&O trading investors set this up for net credit.

Profiting from the short call ladder requires patience and practice to understand the market movement. You should engage in this when you are thoroughly sure that the market will move to a higher position. To better understand it, check out the bear call ladder strategy in detail.

You should base your strategy on a bear call ladder when retail investors’ outlook is bearish moderately about the stock index, underlying asset prices are likely to fall, which triggers the swelling of the options. This ladder strategy comes with 3 options, generally set up for realizing the net credit.

3 Strategies Of Bear Call Ladder Are:

Bear Call Ladder

Usually, in the Bear Call Ladder, three are the most common strategies. And here are three of the strategies.

  • Selling 1 ITM or In the Money call option
  • Purchasing of 1 ATM or At the Money call option
  • Purchasing of 1 OTM or Out of the Money call option

This is a classic bear ladder formulation that shows that 1 ITM call option is sold, and 1 ATM call option is available. And 1 OTM call option was purchased with a 1:1:1 combination. Various other combinations are 3:3:3 and 2:2:2.

When Performing The Bear Call Ladder, Note The Listed Tips:

What things do you have to count while applying the Bear Call Ladder? Here are some of the tips and tricks for applications of this strategy.

  • Choose options providing a higher liquidity
  • Open interest ranges from 100 to 500, wherein 100 is considered as the base limit and 500 is thought to be better
  • The lower strike portrays ITM
  • Medium strike or OTM is 1 or 2 strikes above the OTM
  • The higher strike is further OTM, above the medium strike

Also, you should ensure:

  • All available call prospects are traded during the individual bear call ladder. Which belongs to the same expiry
  • It also belongs under the same underlying causes.
  • The ratio between call options is maintained

Example Of Bear Call Ladder Strategies Implemnetaions 

Let us discuss the bear call ladder trade through an example. Suppose the NIFTY spot is at 7790, and you anticipate it to move to 8100 towards the end of the expiry date. This is a bullish trend. Now, check out how you can initiate the bear call ladder.

Step no. 1: At 7600, sell one ITM call option to realize a premium of Rs. 247

Step no. 2: Buy one ATM call option at the paid premium value of Rs. 117

Step no. 3: Buy a single OTM call option at the paid premium value of Rs. 70

From this deal, the net realized profit is (247- 117) -70 = 60

Wrapping It Up:

It is one of the best scenarios to explain how the bear call ladder trade works. However, in reality, there may be an additional complex case, which will determine whether you will make a profit from the deal or a loss. But the above-listed strategy generalization will assist you to navigate through the complicated call ladders scenario in Future & options.

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Arnab dey

Arnab is a professional blogger, having an enormous interest in writing blogs and other jones of calligraphies. In terms of his professional commitments, He carries out sharing sentient blogs by maintaining top-to-toe SEO aspects. Follow more of his contributions at Finance Team

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