Investment Type: Credit
Strike Prices: ITM for sold leg, OTM for 1st bought leg, further OTM for 2nd bought leg
Expiration Month: Same expiration month for all legs, it can be current month or longer term
Composition: Sell lower strike Call + Buy middle strike Call + Buy higher strike Call

 
  Bear Call Ladder Profile Chart  
 

 
Description:

 

Bear Call Ladder is the extension of Bear Call Spread. Then, extend it again by buying even higher strike price. Therefore our net credit is reduced further in exchange for potential unlimited rewards.

 

When we apply Bear Call Ladder, the expectation can be either bearish or bullish. In Fact, it’s a slight variation from Call Ratio Backspread. The differences is that we use 3 strike prices for Bear Call Ladder while only 2 strike prices are used for Call Ratio Backspread. Also, Bear Call Ladder has wider breakeven point and better risk reward ratio.

 
  Example  
 

 

Entry:


Maximum Initial Investment = $5,000 (or based on 5% money management rule)

Stock Price :
$34.00
   
Buy/Sell :
Sell
    
Strike Price :
32.5 Call
 } Premium: $2.15
Expiration Date :
December
No of Contracts :
40
    

 

Stock Price :
$34.00
   
Buy/Sell :
Buy
    
Strike Price :
35 Call
 } Premium: $0.80
Expiration Date :
December
No of Contracts :
40
    

 

Stock Price :
$34.00
   
Buy/Sell :
Buy
    
Strike Price :
37.5 Call
 } Premium: $0.20
Expiration Date :
December
No of Contracts :
40
    

 

Investment @ Entry = (Premium of lower strike Leg x No of Contracts x 100 Shares) + (Premium of medium strike Leg x No of Contracts x 100 Shares) + (Premium of higher strike Leg x No of Contracts x 100 Shares) = ($8,600) + $3,200 + $800 = Credit ($4,600)

 

Breakeven Point Down = bought leg + Net Credit = $32.50 + $1.15 = $33.65
Breakeven Point Up = (higher strike + middle strike – lower strike) – Net Credit = $37.50 + $35.00 - $32.50 – $1.15 = $38.85

 

Exit:

Best Case Scenario:

Stock Price :
$42.50 up $8.50
    
Buy/Sell :
Sell
    
Strike Price :
32.5 Call
 } Premium: $10.00
Expiration Date :
December

 

Stock Price :
$42.50 up $8.50
    
Buy/Sell :
Buy
    
Strike Price :
35 Call
 } Premium: $7.50
Expiration Date :
December

 

Stock Price :
$42.50 up $8.50
    
Buy/Sell :
Buy
    
Strike Price :
37.5 Call
 } Premium: $5.00
Expiration Date :
December

 

Profit @ Exit = (Premium of lower strike Leg x No of Contracts x 100 Shares) + (Premium of medium strike Leg x No of Contracts x 100 Shares) + (Premium of higher strike Leg x No of Contracts x 100 Shares) – Investment @ Entry = ($40,000) + $30,000 + $20,000 – ($4,600) = $14,600

 

Return of Investment = Profit @ Exit / Investment @ Entry = 317%

 

Worst Case Scenario : (Difference between Strike prices – Net Credit) x no of contracts

 

Stock Price
Profit/Loss
ROI
30.00
4600
100%
32.50
4600
100%
35.00
-5400
-117%
37.50
-5400
-117%
40.00
4600
100%
42.50
14600
317%