Short Call Ladder strategy is an extension to a Call Spread by buying an additional call option.
There are three different striking prices involved in this strategy.
An investor sells a call option of a lower strike price, purchases a call at the middle strike price and purchases another call option of a higher strike price, all of the same underlying security and same expiry.
When to use this strategy?
This strategy is used when the investor expects high volatility in the short term, with a bullish bias.
How to build this strategy?
This strategy has three legs:
Leg 1 – Sell 1 ITM Call
Leg 2 – Buy 1 ATM Call
Leg 3 – Buy 1 OTM Call
Credit Spread/Debit Spread
This is a Credit Spread strategy.
This strategy has unlimited profit potential.
When is this strategy profitable?
The investor earns limited profit if the underlying price goes down.
But the investor’s profit is unlimited if the price of the underlying security rises sharply above the strike price of the call options purchased.
The investor faces limited risk in this strategy.
When is this strategy unprofitable?
The investor faces losses if the price of the underlying security at expiry is between the strike prices of the call options purchased.