Question

Explain how to build a bull call ladder, what are the purposes of a bull call ladder strategy? Build a real life bull call ladder for an American stock of your choice, pull the options contracts and paste them on the answer. Please explain each part of it, what the credit or debit will be for the transaction, include every detail of each option contract you will use to build the bull call ladder trade.

Answer 1

The bull call ladder spread is a little more complex than the bull call spread, but it only involves one extra transaction for a total of three transactions. These three transactions can be made simultaneously or, if you prefer, you can use legging to carry them out at different times and possibly increase the potential profits.

One of the transactions is buying calls, with the expectation that they will increase in value due to the price of the underlying security going up in price. The other two transactions are both writing calls, at different strikes, essentially for the purposes of the offsetting the cost of buying the calls.

The first thing you need to do before use this strategy is to determine what strikes you are going to use. You should probably simply buy at the money calls for the long leg of the spread, but you need to put some thought into the strikes for the two short legs. We would advise that you write one batch of options with a strike equal to approximately what price you think the underlying security will rise to, but not exceed, and write another batch of options with the next highest strike.

You can use higher strikes if you choose, but these will be a cheaper price, and you won't receive as much credit to offset the upfront cost of the long leg. The advantages of using higher strikes, though, are that the strategy will require less margin and you can potentially make more profits.

All three legs should use contracts with the same expiration date. For the purposes of showing how the bull call ladder spread can be applied, we’ll use a theoretical example.

Let’s assume that Company X stock is trading at $30, and you believe its price will increase up to around $35, but it will go no higher. You would make the following three transactions.

Buy at the money calls based on Company X stock, with a strike price of $30.
Write the same number of calls, with a strike of $35.
Write the same number of calls again, with a strike of $36.
Now let’s look at the sums of money involved in creating this spread. Please note, these prices are hypothetical and we haven't accounted for any commission costs.

At the money calls (strike $30) are trading at $1. You buy 2 contracts, each containing 100 options, for a total cost of $200.
The calls with a $35 strike price are trading at $.30. You buy 2 contracts, each containing 100 options, and receive a credit of $60.
The calls with a $36 strike price are trading at $.20. You buy 2 contracts, each containing 100 options, and receive a further credit of $40.
The upfront cost of $200 for buying the options is offset by $100 because of writing the options with a higher strike. In this example, you have created a bull call ladder spread for a cost of $100. We now need to look at what the results of this strategy will be, depending on how the price of Company X stock moves.

Thanks