The purpose of buying the additional strike is to get unlimited reward if the underlying asset moves up. A Short Call Ladder spread should be initiated when you are expecting big movement in the underlying assets, favoring upside movement.
Profit potential will be unlimited when the stock breaks highest strike price. Also, another opportunity is when the implied volatility of the underlying assets falls unexpectedly and you expect volatility to go up then you can apply Short Call Ladder strategy. Strike price can be customized as per the convenience of the trader.
Unlimited if stock surges above higher breakeven. Suppose Nifty is trading at A is expecting a significant movement in the Nifty with slightly more bullish view, so he enters a Short Call Ladder by selling call strike price at Rs , buying strike price at Rs and buying call for Rs The net premium received to initiate this trade is Rs It would only occur when the underlying assets expires in the range of strikes bought. Maximum profit would be unlimited if it breaks higher breakeven point.
For the ease of understanding, we did not take in to account commission charges. Following is the payoff chart and payoff schedule assuming different scenarios of expiry. At the initiation of the trade, Delta of short call condor will be negative and it will turn positive when the underlying asset moves higher. Short Call Ladder has a positive Vega. Therefore, one should initiate Short Call Ladder spread when the volatility is low and expects it to rise.
A Short Call Ladder has negative Theta position and therefore it will lose value due to time decay as the expiration approaches. This strategy will have a long Gamma position, which indicates any significant upside movement, will lead to unlimited profit. A Short Call Ladder is exposed to limited loss; hence it is advisable to carry overnight positions.
However, one can keep stop Loss in order to restrict losses. A Short Call Ladder spread is best to use when you are confident that an underlying security will move significantly.
Another scenario wherein this strategy can give profit is when there is a surge in implied volatility. It is a limited risk and an unlimited reward strategy if movement comes on the higher side. Stocks Mutual Funds Insurance. Home Knowledge Centre Article Detail.
Significant moment higher side. Limited expiry between upper and lower breakeven. Limited to premium received if stock falls below lower breakeven.More...