≑ Menu

How to Trade a Short Call Ladder

Fill this Form to Get 5 Day Free Course on Option & Download Option Greeks PDF File - Download Link Will Be Sent To Your Email

Option & Future Conservative Hedging Courses
Nifty | Banknifty | Testimonials | Course Fees
Must Read Pages
About Me | Mistakes To Avoid In Trading | 3% A Month Is Not Less

If you love trading Ladders then you should learn how to trade a Short Call Ladder Strategy (or Short Put Ladder that I will discuss in my next post). The reason is that they have limited risk, unlimited profits potential (only on paper) – in reality Short Call Ladder is not a good strategy. We will shortly know why.

On paper they are better than Long Ladders because of the limited risk and unlimited profits – but unfortunately though limited, the risk is just too much on the Short Call Ladder and getting unlimited profits is difficult. Therefore you should know this strategy to actually avoid trading this. Still I highly recommend you read this article to enhance your knowledge.

I don’t have a problem with too much limited risk if the risk can be managed. However, with Short Call Ladder the only option is to take a stop loss if the risk increases beyond comfort level. Interestingly even that cannot be done as the stock has to travel from the worst zone to the best zone.

If you don’t know whether the stock will be in the best zone a few days from now or on expiry day – how can you even take a stop loss when the stock is in the worst zone? If you did not understand what I just said, it’s fine, I will discuss this later as well.

How to Trade a Short Call Ladder?

The view: If you think Nifty/Stock will move up during the next few days and volatility too will increase, Short Call Ladder is one of the (worst) strategies to play.

Note: There are many better strategies to play if your view is bullish. The risk-reward is good in this strategy, but only on paper. You will shortly know why this strategy is not a good bullish play.

The Short Call Ladder Trade:

Sell 1 Lot In The Money (ITM) Call Option
Buy 1 Lot At The Money (ATM) Call Option
Buy 1 Lot Out of The Money (OTM) Call Option

Risk: Limited
Reward: Unlimited

First have a look at the graph below and then read to understand the trade:

short call ladder profit and loss graph

Please Note: In the above graph the trader has received a credit trading the Short Call Ladder. However when I looked for real prices that were given to me as a retail trader, I had to give a credit. In rare occasions you may also get a credit. If you get a credit this trade may be tried, because if the stock falls you will end up keeping the credit. If the stock rises too much, you end up making money. Still this is not a good trade as the credit you may receive will be small and not justify the risk you take.

I will now trade a real (paper) trade as an example to help you understand why this trade is not as good as it sounds. I highly recommend looking for some other trade like a debit spread trade if your view is bullish. You can even try long call ladder. Though in the long call ladder the risk is unlimited its a better trade in my view because the stock has to travel from a profitable zone to a loss making zone. You can always stop out your profits before the stock moves into the negative zone. πŸ™‚

Lets do the trade:

Date: 22-December-2014
Time: 1.35 pm (Markets are Open)
Nifty Spot: 8247
India VIX (Volatility): 14.61

Note: Volatility may drop or rise, we don’t know. But still lets trade this as the results will be shown for the expiry day, so for this paper trade volatility does not matter.

(For people who don’t know, on the expiry day there is zero volatility and time value in an option. What is left is the intrinsic value. Therefore we are right now not much bothered about the Volatility.) However increase in Volatility will help as the trader here has double the number of buy options than sell options. Volatility helps the option buyer. (Increase in Volatility means option values will also increase.)

Lets get the Jan 2015 option prices online. Dec 2014 options will expire 3 days from today so I have taken January values:

Sell 1 Lot In The Money (ITM) Call: 29-Jan-15 8,200 CE: 209.75
Buy 1 Lot At The Money (ATM) Call: 29-Jan-15 8,300 CE: 148.00
Buy 1 Lot Out of The Money (OTM) Call: 29-Jan-15 8,400 CE: 98.90

Note: Since Nifty is at 8247 we could have traded this with 8100, 8200, & 8300 – with 8200 treated as ATM. In our current trade we are treating 8300 as ATM.

Had I done the trade with 8100-8300 my risk would have increased as I will buy the 8200 and 8300 option – though I will receive more from selling the 8100 option – my total outgoing will be bigger than the current trade.

I am not comfortable with putting too much money on risk, but your view may differ. Depending on your comfort level you can always treat slightly In The Money options (ITM) as At The Money (ATM).

You can say in that case I should have gone further up to save money. Well you have a valid question, but there is a problem. My risk will increase if I go up. Why will the risk increase? Because Nifty will have to move up significantly to generate profits. Later we will see why a significant move is required. A small movement will still be a loss for a short call ladder done on strikes deep out of the money.

The decision to trade which strike price is a VERY important decision for an option trader, especially if the trade involves trading At The Money (ATM) options and when the stock or Index is NOT exactly At The Money (ATM).

Some may say, I could have chosen the 8250, 8350 and 8450 options – but people who have taken my course know that I hate trading these options as they are not highly liquid. (Once I was not even able to take a stop loss in the 50s option because no one was trading. Result? By the time it was liquid I lost close to 17,000 πŸ™ . Lesson learned – stop trading options that are not liquid.)

Liquid options also helps to get a better fill, and make more money in the same effort because the ask and bid are very close. Moreover the results will be almost same. So why take the extra risk?

Now lets do the Short Call Ladder Trade. (To keep calculations simple I always do paper trading in 100 shares. Risk reward remains same for 1 lot or 4 lots on margin blocked):

Sell 8,200 CE: 209.75 * 100 = +20975
Buy 8,300 CE: 148.00 * 100 = -14800
Buy 8,400 CE: 98.90 * 100 = -9890

Total Debit: 20975-14800-9890 = 20975-14800-9890 = -3715

This is not our max risk. We will see soon max risk is too much in this trade.

Lets see the results on the expiry day:

Nifty at 8,200 on 29-Jan-15:

All options expire worthless. The trader loses Rs. 3715.00. Nifty expiring anywhere below 8200 the results will be same.

Nifty at 8,300 on 29-Jan-15:

Sell 8,200 CE will be 100: 20975 – (100 * 100) = +10975
Buy 8,300 CE will expire worthless: -14800
Buy 8,400 CE will expire worthless: -9890

Total Loss: 10975-14800-9890 = -13,715.00

This is our max risk. For selling 100 shares of Nifty almost 55,000 will be blocked. Since buying is for protection, most brokers will not block capital required for 8300, but for 8400 buy almost 10,000 will be blocked. Total margin required: 55000 + 10000 = 65,000.

Lets calculate the % max risk: (-13715/65000)*100 = -21.10%

Is this really limited risk? Are you comfortable losing 21% of your capital if wrong in just one trade? At least I am not. I don’t care what profits a trade can make – but if the risk is hard to manage and 21% of my money is at risk – I will not trade such a trade. Period.

Nifty at 8,400 on 29-Jan-15:

Sell 8,200 CE will be 200: 20975 – (200 * 100) = +975
Buy 8,300 CE will be 100: -14800 + (100 * 100) = -4800
Buy 8,400 CE will expire worthless: -9890

Total Loss: 975-4800-9890 = -13,715.00

Nifty at 8,500 on 29-Jan-15:

Sell 8,200 CE will be 300: 20975 – (300 * 100) = -9025
Buy 8,300 CE will be 200: -14800 + (200 * 100) = 5200
Buy 8,400 CE will be 100: -9890+ (100 * 100) = 110

Total Loss: -9025+5200+110 = -3715.00

Note: On expiry if Nifty is anywhere below 8500, the trader still loses. Remember that this trade was initiated when Nifty was at 8247. Even after traveling more than 3% if a bullish trade loses money then it cannot be called a good strategy. Had you done a debit spread you would have made great money by now.

Nifty at 8,600 on 29-Jan-15:

Sell 8,200 CE will be 400: 20975 – (400 * 100) = -19025
Buy 8,300 CE will be 300: -14800 + (300 * 100) = 15200
Buy 8,400 CE will be 200: -9890+ (200 * 100) = 10110

Total Profit: -19025+15200+10110 = 6285.00

Nifty at 8,700 on 29-Jan-15:

Sell 8,200 CE will be 500: 20975 – (500 * 100) = -29025
Buy 8,300 CE will be 400: -14800 + (400 * 100) = 25200
Buy 8,400 CE will be 300: -9890+ (300 * 100) = 20110

Total Profit: -29025+25200+20110 = 16285.00

With every 100 points up-move the profits will increase by Rs. 10,000.00.

Now let me tell you why I told earlier that “if you don’t know whether the stock will be in the best zone a few days from now or on expiry day – how can you even take a stop loss?”

The problem as you can now see from the above results is that to get into a profitable zone Nifty will have to travel through the worst zone that is from 8247 to 8500 and then some more to make a decent profit for the trader.

In real world the trader will become nervous even if Nifty is climbing up. Why? Because its a long journey for it to travel to hit the profitable zone. In desperation the trader will book a loss somewhere between 8300 and 8400 (the worst zone), never waiting for the real profits to come.

This is again a big reason as to why this trade should not be done on deep Out of The Money (OTM) options. Your total money on risk may reduce, but chances of losing money also increases. Here even after a 3% move, the trade is in loss. A deep out of the money trade may be a loser even after a 5% move.

Yes, if VIX increases substantially and expiry is a few days away, there is a chance that the trade will be in small profit even in the 8300-8500 zone. But what are the chances for that? Usually VIX decreases when Nifty is going up. This again is negative for this trade.

In view of the above, this trade is best avoidable. Look for other trades when bullish. But I hope you gained some knowledge out of this article. If yes my job is done. πŸ™‚

Conclusion:

  • In Short Call Ladder a trader sells one ITM call, and buys one ATM call and one more OTM call.
  • The stock needs a significant move up to realize a profit.
  • Risk-reward is good on paper, bad in real trade because the stock has to travel from a negative zone to a positive zone. The trader will almost always stop out in the negative zone.
  • Avoid this trade, look for better trades when bullish.

Do share your experiences of trading a Short Call Ladder or any other ladder strategy.


Fill this Form to Get 5 Day Free Course on Options & Download Option Greeks PDF File - Download Link Will Be Sent To Your Email

What you should do now

1. If you have still not subscribed for my free 5 days course you can do by filling the form above. You will learn a lot about option trading.

2. If you are a new option trader, not much experienced and are making losses you can do my paid course. I recommend Nifty Conservative Option Course for beginners because it is easy to understand and easy to trade. Even a 18 year old young trader or a housewife can learn it and start trading from next day. It will help you to earn consistent monthly income without any software or speculation or stress or big risk. You will learn proper hedging strategies that works in any market condition.

3. If you are banknifty weekly options trader you can do my Bank Nifty Weekly Options & Futures Strategy Course. You will learn future and option hedging strategies that works in volatile market condition.

Testimonials

What Traders Say About My Course

Course fees: Click here to know the course fees.

Here is complete process of my course

1. Once you pay I will send you the course materials for studying to your email.
2. You read and ask me questions via phone/whatsapp/email to clear doubts.
3. Then you start paper trading and still can ask me questions.
4. After about one month you can start trading.
5. Since doubts can come anytime the support will be there for one year.

Within one month you can start trading on your own. No need to depend on anyone once you are on your own.

If you have any question you can contact me.

You can read about me here and my trading mistakes here.

TheOptionCourse.com Copyright @ All Rights Reserved
Dilip Shaw, Founder

Copyright Infringement: Any act of copying, reproducing or distributing any content in the site or newsletters, whether wholly or in part, for any purpose without my permission is strictly prohibited and shall be deemed to be copyright infringement.

INCOME DISCLAIMER: Any references in this site of income made by the traders are given to me by them either through Email or WhatsApp as a Thank You message. However every trade depends on the trader and his level of risk taking capability, knowledge and experience. Moreover stock market investments and trading are subject to market risks. Therefore there is no guarantee that everyone will achieve the same or similar results. My aim is to make you a better & disciplined trader with the stock trading and investing education and strategies you get from this website. Please note that I DO NOT give tips or advisory services by SMS, Email, or WhatsApp or any other form of social media. I strictly adhere to laws of my country. I only offer education on finance, investments on stock markets in the best possible way as much as I can through this website. Still, you must consult an authorized advisor or do thorough research before investing in any stock or derivative before trading any strategy given in this website. I am not responsible for any investment decision you take after reading any article given in this website. Knowledge is the only way to get success in stock markets. I try my best to give stock market investing and trading knowledge through the articles posted in this website. Thanks for visiting my website.

How To Trade Neutral Calendar Spreads
Greed is Not Good in Stock Market Trading

About the author: I started trading stock markets since 2007. However my first 3 years were losses. Then I dedicated almost 1 year on studying, researching, paper trading options and learned a lot in that time. Since 2011 I am trading Nifty options profitably. Call me if you need any help trading options on 9051143004.

{ 8 comments… add one }
  • Abhishek Patil

    Hi Dilip Sir, Eagerly waited for your post since 11 Dec.Merry Christmas Sir & Happy New Year Sir.
    Bhagwan Aapka Bhala kare….:)

    • Hi Abhishek,

      Merry Christmas & Happy New Year 2015 to you too.

      I am a father of two young kids. I have a consulting job and other professional work which demands my time.

      On top of that we went on a small vacation to Santiniketan – a very serene, quite and peaceful place. Great for traders πŸ™‚

      Somehow I could manage this post.

      Anyways many thanks for reading and awaiting my posts.

      This is very motivating.

      Thanks Again!

  • Babu

    Wish you a very happy new year Dilip !

  • ramesh

    hello Dilip one of my associate recommended this site to me, just went through it i detail, hope you practice what you preach in the course.
    I am missing a performance tab here to the greater extent!!!!!!!
    All are posting their performances periodically
    So where can we see your strategies performance for at least last one year?????
    We don’t need your trades details but one should look at what you made at least with 5lks simulated portfolio month on month.
    Seeing is believing.

    • Ramesh nice to hear that people are recommending this website. Very motivating. Thanks for the information.

      Yes I do trade the conservative strategies only. I have a second account where I have kept some money for research. But in the main account only conservative strategies are traded – be it non-directional or directional.

      Performance tab. Ramesh do you think the performance reports on most sites are true? If yes why do people lose money trading their tips? DonÒ€ℒt believe me? Pay any site with a great past performance and be ready to lose money. πŸ™‚ Even I lost money with 4 advisory companies. But thanks to them – I started reading options.

      Remember this – my performance has nothing to do with yours. Look at what you will learn from the course and not how much I am making from my trades.
      Take your call.

  • ramesh

    Sorry, You got it wrong, all that I am expecting is,
    you simulate your strategies you teach in the course with a paper capital of 5lks and post the end figure of each trade by month end, its as simple as that, we as a readers of sites like these have our own way of dealing such data, don’t worry about that!
    after all we would like to see the execution of what is perched, from the man himself who created the course!

    • Legitimate question Ramesh.

      I am also looking into it to see if its possible. Let me tell you this will only increase the number of people taking my course πŸ™‚

      All I can say at the moment is that I rarely have a losing month just because I don’t go overboard and I trade very conservatively.

      However there are some issues with taking out the data.

      I have a huge trading data. I will have to take out the brokerages that I have used to calculate profit and loss in my trade sheet in both buy and sell. I will have to take out results from the conservative directional trades that I took. Though they are part of my course and I can claim them to be “performance”, but in true sense it is not. Because directional trades are based totally on the view of the trader. He/she can make profits/loss 100% of the times.

      When I had only one account a lot of research also went into it with real trades – that needs to be taken out to get a fair result month after month. It will be hard for me to remember which of those trades were research.

      Its huge work and I will see if this is really necessary. Not many traders who call me are bothered with my past performance. Some people do not buy my service because of that. I am OK with that. I am not looking to become a millionaire from this site.

      On top of that, past performance can never be a guarantee of future performance. Plus I don’t want to “sell” my service to people who only look at my past performance and buy my service. My service is for people willing to learn conservative strategies and work to achieve good returns from their portfolio.

      People who have taken my course call me and thank me for the strategies.

      And Ramesh past performance is for someone looking to get tips to get an idea of how much they can make if they invest “x” amount of money in future. That’s like selling hope. It rarely happens πŸ™‚

      Frankly I am not even comfortable sharing my past performance. Some may think I have one crore in my account and some may calculate it on one lakh. Neither of them are true. It is different from a stock advisory company’s performance. But still if lot of people demand, I may post my past performance.

      Thanks.

Leave a Comment

Menu