Tim Olson
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1.6 KiB
1.6 KiB
description, tags
| description | tags | ||||
|---|---|---|---|---|---|
| A bullish-adjusted strategy selling a near-ATM call at K1 and buying two higher OTM calls at K2 and K3, arising when a bear call spread is adjusted for a stock that trades higher. |
|
Bear Call Ladder
Section: 2.16 | Asset Class: Options | Type: Hedging
Overview
The bear call ladder is a vertical spread consisting of a short call at K1 (near ATM), a long call at K2 (OTM), and a long call at K3 (further OTM, K3 > K2 > K1). A bear call ladder typically arises when a bear call spread goes wrong (the stock trades higher), so the trader buys another OTM call at K3 to adjust the position to bullish.
Construction
- Sell 1 call option at strike K1 (near ATM)
- Buy 1 call option at strike K2 (OTM, K2 > K1)
- Buy 1 call option at strike K3 (further OTM, K3 > K2), same expiry
Net debit or credit H
Payoff Profile
f_T = (S_T - K3)+ + (S_T - K2)+ - (S_T - K1)+ - H
- Lower breakeven: S*_down = K1 - H (if H < 0, net credit)
- Upper breakeven: S*_up = K3 + K2 - K1 + H
- Max profit: P_max = unlimited (above S*_up)
- Max loss: L_max = K2 - K1 + H (in zone [K1, K2])
Key Conditions / Signals
- Bullish adjustment to a bear call spread that has moved against the trader
- Profits if the stock continues to rise significantly above K3
- Low volatility near K1 environment after adjustment is undesirable
Notes
The bear call ladder converts a bearish income strategy into a bullish capital gain strategy. The additional long call at K3 limits the maximum loss zone and creates profit on a sharp rally.