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A ladder option is an options strategy that combines three options of the same type, either all calls or all puts, at three different strike prices. It works like a vertical spread with a third strike added to change the risk and reward profile. A long ladder benefits from low volatility and moderate price moves. A short ladder benefits from high volatility and large price moves in either direction.
The term "ladder option" also refers to a type of exotic option where the holder locks in gains as the underlying asset hits each price level, called a rung. Both meanings share the same visual logic: multiple price levels arranged like the rungs of a ladder.
A long call ladder involves buying one call at a lower strike price and selling two calls at progressively higher strike prices. You pay a net debit or collect a small net credit depending on how the strikes are spaced.
The trade profits if the underlying rises moderately and stays between the two short call strikes at expiration. The danger is a sharp move above the highest strike, where both short calls lose value faster than the single long call can offset. This creates theoretically unlimited loss potential on the upside, which is why the strategy is only appropriate if you are confident the underlying will not blow through your highest strike.
A short call ladder sells one lower strike call and buys two calls at higher strikes. This inverts the risk and reward: you pay a net debit or give up a credit, but you gain from a strong move to the upside. The more the price exceeds your highest strike, the more profitable the trade becomes.
Think of a long ladder as betting on a tight trading range and a short ladder as betting on a breakout.
All three options in a ladder strategy must share the same expiration date. Mixing expiration dates turns the position into something else entirely.
In the world of exotic derivatives, a ladder option works differently. Instead of three legs at different strikes, it is a single contract that locks in payouts as the underlying crosses each predetermined price level during the option's life. Each level is a rung.
If the underlying reaches the first rung, that gain is secured regardless of what happens next. If it reaches the second rung, the second payout is also locked. This structure protects unrealized profits at each milestone and is popular in structured products for corporate hedgers.
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