Introduction
- Options trading is mainly perceived as a high-return investment. However, with the opportunity to earn high profits comes the risk of significant losses.
- That's why you will find many strategies in options trading that help you cap your loss to a certain amount right from the beginning.
- One such strategy is known as the bear call ladder strategy.
- It's employed to trade for higher profit, which theoretically can be unlimited while ensuring that the maximum risk will be limited. So, let's learn everything about this strategy.
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What is the Bear Call Ladder Strategy?
- A ladder is an options contract that can be a call or a put. The 'bear' in the bear call ladder strategy can be misleading, as the market must be bullish and not bearish to profit from the bear call ladder strategy.
- This strategy is also known as the short call ladder strategy because you buy the new call options by selling out an 'in the money' call option.
- It also requires a deep knowledge of options trading and timed decisions; otherwise, it may result in losses.
- So, let's understand how to execute a bear call ladder strategy.
How can I Execute a Bear Call Ladder Strategy?
A bear call ladder is a three-legged strategy involving three call options, which are ITM, ATM, and OTM based on the strike prices. Some essential considerations before executing this strategy are as follows:
- The expiration dates and under-lyings of ITM, ATM, and OTM should be the same.
- The liquidity of the chosen asset should be high.
- The ITM, ATM, and OTM ratios should be equal, such as 1:1:1, 2:2:2, 3:3:3, and so on.
What are the Steps Involved in the Execution of the Bear Call Ladder Strategy?
To successfully execute this strategy, you should follow the four steps given below:
- Identify if the market is bullish or not, and continue only if the market is bullish.
- Sell an ITM call option in your preferred quantity, say one.
- After selling the ITM, buy one ATM, which should be at least 200 points higher than the ITM, to minimize the losses.
- Finally, buy one OTM a few points higher than the ATM, and the bear call ladder strategy is executed.
Summing Up
- The bear call ladder is an effective yet complex strategy.
- The profit can be determined by subtracting the prices of ATM and OTM from the premium of ITM.
- For example, if ITM, ATM, and OTM are Rs. 270, Rs. 110, and Rs. 70, respectively, the profit will be Rs. 60.
- Now that you know about the bear call ladder strategy, open a DEMAT account with Motilal Oswal and start trading today!
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