Bull Call Ladder
Description
The Bull Call Ladder is an extension to the Bull Call Spread. By shorting another call
at a higher strike price, the position assumes uncapped risk potential if the stock soars
upwards. The problem is that now its not totally clear if we have a bullish or bearish
strategy, so we have to designate it as a direction neutral strategy! We’d love the stock
to rise to the middle strike price (the first Short Call) but not above the higher short
call strike price. Anywhere in between the middle and higher strike is ideal.
Because of the dangers of uncapped risk, this strategy becomes more appropriate
for a short-term income trade. The net effect of the higher short strike is to reduce
the cost and breakeven of the Bull Call Spread and adjust the directional nature of
the trade. The higher call strike prices are further OTM and will therefore have
lower premiums than the lower strike bought call.
So, in summary, if the stock falls below the lower (buy) strike, you can make a loss;
if the stock rises to anywhere between the middle and upper (short) strikes, you make
your maximum profit; if the stock rises above the highest strike, then you can make
unlimited losses. The extra leg also ensures that you may have two breakeven points.
P/L Profile
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