By Viraj Bhagat We have previously come across the following strategies:

These Options Trading Strategies are a combination of both a Bull Spread and a Bear Spread. I would be taking you through the Bear Call Ladder that is also an extension to the Bear Call Spread and explain the strategy using a Live Trading Market example by coding the strategy in Python.

Ladders are an options contract (call or put) that allow earning profits till the market price of the asset reaches one or more strike prices before the option expires. It resets during specific trade levels by capping the profit between the old strike and the new strike price in either or both directions, thus allowing flexibility in the payoff. Like the rungs of a ladder, the trigger strikes reduce risk and once the market price of the asset reaches the trigger, it locks in the profit, thus increasing the profitability.

### What Is A Bear Call Ladder?

The Bear Call Ladder is also known as the 'Short Call Ladder' and is an extension to the Bear Call Spread. Although this is not a Bearish Strategy, it is implemented when one is bullish. It is usually set up for a ‘net credit’ and the cost of purchasing call options is financed by selling an ‘in the money’ call option. For this Options Trading Strategy, one must ensure the Call options belong to the same expiry, the same underlying asset and the ratio are maintained. It mainly protects the downside of a Call sold by insuring it i.e. by buying a Call of a higher strike price. It is essential though that you execute the strategy only when you are convinced that the market would be moving significantly higher.

The Bear Call Ladder is a 3 legged option strategy, usually set up for a “net credit”, for the same underlying instrument with a higher exercise date and price and for the same expiry date. The Bear Call Ladder will look something like this:

#### Options Selection

• Select Options with good liquidity
• Open interest should be at least 100, preferably 500
• Lower Strike - ITM
• Middle Strike - One or two strikes above the lower strike, i.e., further OTM
• Higher Strike - Above the middle strike, i.e., even further OTM

#### Execution

• Selling 1 ITM call option
• Buying 1 ATM call option
• Buying 1 OTM call option

Executed in a 1:1:1 ratio combination, i.e. for every 1 ITM Call option sold, 1 ATM and 1 OTM Call option has to be bought. (ie by selling 1 ITM, buying 1 ATM, and 1 OTM) Other possible combinations are 2:2:2 or 3:3:3 (so on and so forth).

#### Preference Over Call Ratio Spread

• An improvisation over the Call Ratio Spread
• The Call Ratio Spread is created using Call Options, buying 1 ITM Call and selling 2 ATM Call options. More options are sold than bought, making the excess option coverless which is a risk to the trader.
• Here, the cost of execution is better than the call ratio spread (due to this the range above which the market has to move also becomes large)
• Cash flow is invariably better since the Call bought is of a higher strike price than the Call sold

#### Risk

Trader or investor buys more calls than they are selling, therefore, Limited Max. Risk

#### Breakeven

• Lower Breakeven = Lower Strike + Net Credit
• Upper Breakeven = Long Strike - Short Strike - Net Premium

Net Credit = Premium Received from ITM CE – Premium paid to ATM & OTM CE Payoff = When the market goes down = Net Credit

Tips:
- Understand the direction of the trend
- Identify a clear area of support
- Identify the resistance

#### Expiration

Term: Only the Nifty options are of 6 months and are liquid, unlike others. Around 6 months would be safer. Use the same expiration date for all legs.

#### Alternatives Before Expiry

• Common Practise: Close before expiry to capture profit OR Since there are 2 Long Calls, stem the loss
• Best: Close from Medium term to Expiry
• Alternatives After Expiry: Closeout. Sell the purchased calls and buy back the calls sold

The biggest advantage here is the ability to profit in 4 out of 5 possible moves in the underlying asset and an Unlimited profit to upside movement

Since it is a net credit spread, the margin is needed

If ABC is currently trading at 50. The markets are expected to rise. So here’s what the trader does:

• Sell 1 ITM 55 strike call for INR 5
• Buying 1 ATM 60 strike call for INR 2.5
• Buying 1 OTM 65 strike call for INR 1

The investor can get an inflow of the premium of 1.5 and benefit if the ABC stays below 500.

• Net Credit = Premium Sold - Premium Bought = 5 - 2.5 - 1 = 1.5
• Maximum Risk = Middle Strike - Lower Strike + Net Debit (or - Net Credit) = 60 - 55 - 1.5 = 3.5
• Maximum Reward = Unlimited
• Breakeven (Downside) = Lower Strike + Net Debit (or + Net Credit) = 55 + 1.5 = 56.5
• Breakeven (Upside) = Higher Strike + Maximum Risk = 65 + 3.5 = 68.5

### Live Example

To explain the Bear Call Ladder Trading Strategy, we would be using the following Live Market Example of the State Bank of India (Ticker: SBI) currently using the Options Chain obtained from nseindia.com.

### Python Code For Bear Call Ladder Strategy

#### Import Library

import numpy as np
import matplotlib.pyplot as plt
import seaborn
seaborn.set(style="darkgrid")

#### Calculate Payoff

def call_payoff (sT, strike_price, premium):

# SBI spot Price
s0 = 250

# Long Call

OTM_long_call = 260

ATM_long_call = 250

# Short Call

ITM_short_call = 240

# Range of call option at epiration
sT = np.arange(200,300,1)

#### Long Call 1 Payoff

OTM_long_call_payoff = call_payoff(sT, OTM_long_call,premium_OTM_long_call)

fig, ax = plt.subplots()
ax.spines['bottom'].set_position('zero')
ax.plot(sT,OTM_long_call_payoff, color='g')
ax.set_title('LONG 30 Strike Call')
plt.xlabel('Stock Price')
plt.ylabel('Profit & Loss')
plt.show()

#### Long Call 2 Payoff

ATM_long_call_payoff = call_payoff(sT, ATM_long_call, premium_ATM_long_call)

fig, ax = plt.subplots()
ax.spines['bottom'].set_position('zero')
ax.plot(sT,ATM_long_call_payoff, color='g')
ax.set_title('LONG 35 Strike Call')
plt.xlabel('Stock Price (sT)')
plt.ylabel('Profit & Loss')
plt.show()

#### Short Call Payoff

ITM_Short_call_payoff = call_payoff(sT, ITM_short_call, premium_ITM_short_call)*-1.0

fig, ax = plt.subplots()
ax.spines['bottom'].set_position('zero')
ax.plot(sT, ITM_Short_call_payoff, color='r')
ax.set_title('Short 32.5 Strike Call')
plt.xlabel('Stock Price')
plt.ylabel('Profit & Loss')
plt.show()

Bear_call_ladder = OTM_long_call_payoff + ATM_long_call_payoff + ITM_Short_call_payoff

fig, ax = plt.subplots(figsize=(8,5))
ax.spines['bottom'].set_position('zero')
ax.plot(sT, ATM_long_call_payoff,'--', color='g',label='ATM Long Call')
ax.plot(sT, OTM_long_call_payoff,'--', color='g', label='OTM Long Call')
ax.plot(sT, ITM_Short_call_payoff, '--', color='r', label='ITM Short call')
plt.legend()

plt.xlabel('Stock Price')
plt.ylabel('Profit & Loss')
plt.show()

Bear_call_ladder = OTM_long_call_payoff + ATM_long_call_payoff + ITM_Short_call_payoff

fig, ax = plt.subplots(figsize=(8,5))
ax.spines['bottom'].set_position('zero')
plt.legend()
plt.xlabel('Stock Price')
plt.ylabel('Profit & Loss')
plt.show()

Profit = max(Bear_call_ladder)

print Profit
print Loss
Max. Profit: 33.7
Max. Loss: -5.30

### Conclusion

The Bear Call Ladder or Short Call Ladder is best to use when you are confident that an underlying security would be moving significantly. It is a limited risk and an unlimited reward strategy if the movement comes on the higher side.