The bear call spread is expanded by a bear call ladder since it now includes a second long call. Although the strategy’s name would lead one to believe otherwise, it is actually either very bullish or bearish because it has a limited downside gain and an unlimited upward gain.
Alias
Short Call Ladder
Description
Involves selling call options at three different strike prices. The trader sells a call option with a high strike price and also sells a call option with a lower strike price, while buying a call option with an even lower strike price (this is known as a “call spread”). The trader is betting that the underlying stock price will decline, and profits from the strategy if the stock price goes down.
The bear call ladder is a limited risk, limited reward strategy, because the potential profit is limited to the difference between the strike prices of the short call options, plus the initial premium received for selling the options. If the stock price doesn’t decline as expected, the trader may be assigned and required to sell the stock at the lower strike price of the short call options. However, if the stock price declines, the trader can profit by buying back the short call options at a lower price, or by allowing them to expire worthless. It can be an effective way to profit from a bearish market with limited capital, but it’s important to understand the risks and limitations of this strategy.
For this method to be successful, there must be a lot of volatility. Time is detrimental when a position is unprofitable but advantageous when it is profitable.
Breakeven
Leg 1 plus the net credit received
Leg 3 plus the net credit received
Sweetspot
Stock price goes way up
Max profit
limited to the difference between the strike prices of the two short-call options, plus the premium received for selling the options.
Max loss
limited to the difference between the strike prices of the two long call options, minus the premium received for selling the options.
