What Are Ladder Options

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Ladder Option

What Is a Ladder Option?

A ladder option is an exotic option that locks in partial profits once the underlying asset reaches predetermined price levels or “rungs.” This guarantees at least some profit, even if the underlying asset retraces beyond these levels before the option expires. Ladder options come in put and call varieties.

Do not confuse ladder options, which are specific types of options contracts, with long call ladders, long put ladders, and their short counterparts, which are options strategies that involve buying and selling multiple options contracts simultaneously.

How a Ladder Option Works

Ladder options are similar to traditional option contracts that give the holder the right, but not the obligation to buy or sell the underlying asset at a predetermined price at or by a predetermined date. However, a ladder option adds a feature that allows the holder to lock in partial profits at predetermined intervals.

These intervals are fittingly called “rungs” and the more rungs the price of the underlying asset crosses, the more profit locks in. The holder keeps profits based on the highest rung achieved (for calls) or the lowest rung achieved (for puts) regardless if the price of the underlying crosses back below (for calls) or above (for puts) those rungs before expiration.

Because the holder earns non-returnable partial profits as the trade develops, total risk is much lower than for traditional vanilla options. The trade-off, of course, is that ladder options are more expensive than similar vanilla options.

Example of a Ladder Option

Consider a ladder call option where the underlying asset price is 50 and the strike price is 55. Rungs are set at 60, 65, and 70. If the underlying price reaches 62, the profit locks in at 5 (rung minus strike or 60 – 55). If the underlying reaches 71, then the locked in profit increases to 15 (new rung minus strike or 70 – 55), even if the underlying falls below these levels before the expiration date.

As with vanilla options, there is time value associated with ladder options. Therefore, the traded price for call options is usually above the locked in profit amount, and declining as the expiration date approaches.

If the price of the underlying falls below any of the triggered rungs, again for calls, it almost does not matter to the price of the option because the partial profit is guaranteed. Although, this is an oversimplification because the lower the underlying moves below the highest triggered rung, the less likely it will be to rally back to exceed that rung and reach the next rung.

Long Call Ladder

The long call ladder, or bull call ladder, is a limited profit, unlimited risk strategy in options trading that is employed when the options trader thinks that the underlying security will experience little volatility in the near term. To setup the long call ladder, the options trader purchases an in-the-money call, sells an at-the-money call and sells another higher strike out-of-the-money call of the same underlying security and expiration date.

Long Call Ladder Construction
Buy 1 ITM Call
Sell 1 ATM Call
Sell 1 OTM Call

The long call ladder can also be thought of an extension to the bull call spread by selling another higher striking call. The purpose of shorting another call is to further finance the cost of establishing the spread position at the expense of being exposed to unlimited risk in the event that the underlying stock price rally explosively.

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Limited Profit Potential

Maximum gain for the long call ladder strategy is limited and occurs when the underlying stock price on expiration date is trading between the strike prices of the call options sold. At this price, while both the long call and the lower strike short call expire in the money, the long call is worth more than the short call.

The formula for calculating maximum profit is given below:

  • Max Profit = Strike Price of Lower Strike Short Call – Strike Price of Long Call – Net Premium Paid – Commissions Paid
  • Max Profit Achieved When Price of Underlying is in between the Strike Prices of the 2 Short Calls

Limited Downside Risk, Unlimited Risk to the Upside

Losses is limited to the initial debit taken if the stock price drops below the lower breakeven point but large unlimited losses can be suffered should the stock price makes a dramatic move to the upside beyond the upper breakeven point.

The formula for calculating loss is given below:

  • Maximum Loss = Unlimited
  • Loss Occurs When Price of Underlying > Total Strike Prices of Short Calls – Strike Price of Long Call – Net Premium Paid
  • Loss = Price of Underlying – Upper Breakeven Price + Commissions Paid

Breakeven Point(s)

There are 2 break-even points for the long call ladder position. The breakeven points can be calculated using the following formulae.

  • Upper Breakeven Point = Total Strike Prices of Short Calls – Strike Price of Long Call – Net Premium Paid
  • Lower Breakeven Point = Strike Price of Long Call + Net Premium Paid

Example

Suppose XYZ stock is trading at $35 in June. An options trader executes a long call ladder strategy by buying a JUL 30 call for $600, selling a JUL 35 call for $200 and a JUL 40 call for $100. The net debit required for entering this trade is $300.

Let’s say XYZ stock remains at $35 on expiration date. At this price, only the long JUL 30 call will expire in the money with an intrinsic value of $500. Taking into account the initial debit of $300, selling this call to close the position will give the trader a $200 profit – which is also his maximum possible profit.

In the event that XYZ stock rallies and is trading at $50 on expiration in July, all the call options will expire in the money. The short JUL 35 call will expire with $1500 in intrinsic value while the short JUL 40 call will expire with $1000 in intrinsic value. Selling the long JUL 30 call will only give the options trader $2000 so he still have to top up another $500 to close the position. Together with the initial debit of $300, his total loss comes to $800. The loss could have been worse if the stock had rallied beyond $50.

However, if the stock price had dropped to $30 instead, all the calls will expire worthless and his loss will be the initial $300 debit taken to enter the trade.

Note: While we have covered the use of this strategy with reference to stock options, the long call ladder is equally applicable using ETF options, index options as well as options on futures.

Commissions

For ease of understanding, the calculations depicted in the above examples did not take into account commission charges as they are relatively small amounts (typically around $10 to $20) and varies across option brokerages.

However, for active traders, commissions can eat up a sizable portion of their profits in the long run. If you trade options actively, it is wise to look for a low commissions broker. Traders who trade large number of contracts in each trade should check out OptionsHouse.com as they offer a low fee of only $0.15 per contract (+$4.95 per trade).

Similar Strategies

The following strategies are similar to the long call ladder in that they are also low volatility strategies that have limited profit potential and unlimited risk.

Comparison of option types (3) – Ladder options

In the binary opions world, you will hear about many different types of options: Touch options and No-touch options, classic medium-term high-low options offered by all brokers, KIKO options by broker Stockpair, Ladder options (for example tradeable with Optiontrade) and many other.

But which of these options is the best to trade? Why should you choose your broker broker just by the offered options and expiration times? In today’s article, we will look at ladder options and in the next episode, we will look at 60-second binary options.

Ladder binary options

Ladder binary options are harder to understand than other types of options and therefore, I will try to explain everything in a simpler fashion. I’ll start with a picture.

Preview of platform for trading ladder options

From the picture above, we can see how ladder options trading works. The trader speculates on the future price development, but this time the strike price is not set. So how does it work?

Let’s look at the picture again. We read the following:

  • Current price of EUR/USD currency pair is 1.08280
  • Colored boxes on the right show prices 1.08175, 1.08214, 1.08254, 1.08294 and 1.08333
  • Each of these prices carries a different percentage (profit)

Trading ladder options works by presetting some strike prices and afterward, we only speculate about whether the final price at expiration will be higher or lower than the set price. The current price at the expiration determines how much profit we get from the trade.

Our model example: The current price of EUR / USD when using CALL trade had to overcome 14 pips upward for the trade to be profitable and earnings would be up to 98.01%. On the other hand, if we choose PUT trade, the trade is in-the-money since the beginning and we have 14 pips reserve. The expected earnings, however, are lower – only 35%.

Example of CALL trade using Ladder options (trade amount $100)

In the example above, we can see how everything works. A CALL trade with the amount of $100. According to the ladder on the right, we see that the profit increases in direct proportion to the risk associated with acquiring it. Thus, we earn more if we believe that the price is in a strong uptrend and gets even higher until expiration. I hope you understand. If not, leave me a comment here below the article and I’ll try to help you ;-).

Brokers offering ladder options

Ladder type binary options are indeed very interesting and often lucrative, but there are not many high-quality brokers who offer them. One of the brokers offering ladder options is BDSwiss and they are regulated.

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Advantages of this type of binary options

  • Ladder options can achieve astronomical returns (more than 300% profit)
  • In case of a good judgment and a little luck, in some cases, we can never lose (see video above)

Disadvantages of this type of binary options

  • It is difficult to predict the price movements by X pips with such precision, as is the case with other types of options. On the other hand, that’s why it pays off if you do it right.

Author

More about the author J. Pro

Unlike Stephen (the other author) I have been thinking mainly about online business lately. I wasn’t very successfull with dropshipping on Amazon and other ways of making money online, and I’d only earn a few hundreds of dollars in years. But then binary options caught my attention with it’s simplicity. Now I’m glad it did because it really is worth it. More posts by this author

Climbing The Ladder Of Profits

Do You Want To Gain An Edge In Your Account?

Well, do you? If so then I think you will want to know everything you can about ladder style binary options. If I haven’t already gotten your attention let me tell you that a ladder binary option can pay as much as 1400% of investment on an in the money close. This is not a new thing but simply an overlooked, underutilized an unappreciated trading tool available from some brokers. They are not limited to SpotOption based brokers but for this article I will be using RedWood Options for my example. These option embrace the best of both CFTC style 0-100 binary options along with EU/CySEC style spot binary. They use a system of strikes, the ladder, at which you can choose to be high or low. The greatest thing about them is the leverage, or maybe the versatility, or the profits.

What Is A Ladder Binary Option?

A ladder binary options is a super charged form of the standard digital binary trade. The difference is that a standard binary strike price is based on the spot price of the underlying asset where as with ladder binary the strikes are preset. Instead of choosing whether the asset will finish higher or lower than the price it is trading for now you choose whether it will close higher or lower than the chosen strike. A standard binary pays in the range of 70%-95% depending on broker whereas a ladder may pay in a much wider range with greater potential for profits. To put it into perspective a ladder binary option can pay as little as 7%, a fairly safe trade, or as much as 1400%. I bet that got your attention.

I bet by now you are wondering how this can be. It is because ladder binary also incorporates a feature of one touch options ie out of the money trading. With one touch there is only one strike price that the asset has to touch and it is usually way way out of the money making it a very risky trade. Ladder options also have out of the money strikes that pay over 1000%, but there are also less risky strikes as well. The less risky strikes can be in the money or out. An out of the money strike may pay 200% or more while an in the money strike may only pay 20%. Look at the example above. This is the ladder option for the EUR/USD with five strike prices listed. On strike is at the money, two are above and two are below the money. You can choose that the asset will be higher or lower than any of these strikes prices with a payout associated with each one. The payout is constantly changing based on the price of the underlying asset.

Two Ways To Trade With The Ladder

There are two ways to trade with the ladder, well, maybe three. There is the risky way and the safe way, with a third less risky method somewhere in the middle. For risky traders, or those who are certain of a large movement in the underlying asset, you can choose strike prices that are out of the money. This will boost your returns immensely. As an added bonus, you can stick to regular binaries until you get a strong signal and then switch over to ladders in order to catch the movement. Less risky traders may choose to stick to at the money or even in the money options. You can see by looking at my example above that it is possible to purchase an option that is already in the money and capture profits that are nearly guaranteed. Of course, your profits will be smaller than if you choose the risky route but it only takes a few trades per day to add up to a lifetime of success.

My final thoughts on the ladder options? I like them and I am glad that I rediscovered them. They are a great method for trading and provide a lot more flexibility than standard digital binaries. The profit potential is enormous but you have to be careful and trade appropriately. The more risky strikes that pay 1000% or more pay that for a reason and that reason is you are more likely to lose than to win. That being said using them to capture moves on a strong signal and/or market moving event can be highly profitable. At the same time they also offer a way to generate profits while the market is not moving so I think that balances it out. Regardless, I will be keeping the ladder in my bag of tricks.

Ladder Options

Find a complete range of ladder safety attachments and accessories at O’Keeffe’s to enhance worker safety, protect equipment or meet any project condition. We know that safety is your number one concern when using a ladder. With a large selection of options, such as extended brackets, safety posts, landing platforms, and more, we make it easy to find the right aluminum extension ladder parts accessory and stay safe on the job. Whether you simply need an attachment for your ladder to extend its height or a harness for fall protection, we have what you need to feel confident using the equipment you already have.

Interested in learning more about each of our ladder safety attachments? O’Keefe’s has you covered. Knowledge is power, but knowledge also keeps you safe. That’s why we make sure you’re completely informed with in-depth product descriptions. For even more information or to request a free quote on our aluminum extension ladder parts accessory, contact us at 888-653-333 today.

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