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Option Strategies

Bear Call Ladder

Introduction

Bear call ladder, also known as short call ladder, is a combination of a bear call spread and a long call with a higher strike price than the 2 legs of the call spread. All calls have the same underlying Equity and expiration date. This strategy profits from increasing volatility of the underlying asset. For instance, the underlying price moves away from its current price.

Implementation

Follow these steps to implement the bear call ladder strategy:

  1. In the initialize method, set the start date, end date, cash, and Option universe.
    2. Select Language: 
    def initialize(self) -> None:
    self.set_start_date(2017, 4, 1)
    self.set_end_date(2017, 4, 22)
    self.set_cash(1000000)

    self.universe_settings.asynchronous = True
    option = self.add_option("GOOG", Resolution.MINUTE)
    self._symbol = option.symbol
    option.set_filter(lambda universe: universe.include_weeklys().call_ladder(30, 5, 0, -5))
  2. In the on_data method, select the expiration and strikes of the contracts in the strategy legs.
    3. Select Language: 
    def on_data(self, slice: Slice) -> None:
    if self.portfolio.invested:
        return

    # Get the OptionChain
    chain = slice.option_chains.get(self._symbol, None)
    if not chain:
        return
    
    # Select the call Option contracts with the furthest expiry
    expiry = max([x.expiry for x in chain])
    calls = [i for i in chain if i.expiry == expiry and i.right == OptionRight.CALL]
    if not calls:
        return

    # Select the strike prices from the remaining contracts
    strikes = sorted(set(x.strike for x in calls))
    if len(strikes) < 3:
        return
    
    low_strike = strikes[0]
    middle_strike = strikes[1]
    high_strike = strikes[2]
  3. In the on_data method, select the contracts and place the orders.

    4. Approach A: Call the OptionStrategies.bear_call_ladder method with the details of each leg and then pass the result to the buy method.

    Select Language: 
    option_strategy = OptionStrategies.bear_call_ladder(self._symbol, low_strike, middle_strike, high_strike, expiry)
self.buy(option_strategy, 1)

    Approach B: Create a list of Leg objects and then call the combo_market_order, combo_limit_order, or combo_leg_limit_order method.

    Select Language: 
    low_strike_call = next(filter(lambda x: x.strike == low_strike, calls))
middle_strike_call = next(filter(lambda x: x.strike == middle_strike, calls))
high_strike_call = next(filter(lambda x: x.strike == high_strike, calls))

legs = [
    Leg.create(low_strike_call.symbol, -1),
    Leg.create(middle_strike_call.symbol, 1),
    Leg.create(high_strike_call.symbol, 1)
]
self.combo_market_order(legs, 1)

Strategy Payoff

The bear call ladding is an unlimited-profit-limited-risk strategy. The payoff is

ClowT=(ST−Klow)+CmidT=(ST−Kmid)+ChighT=(ST−Khigh)+PayoffT=(Clow0−ClowT+CmidT−Cmid0+ChighT−Chigh0)×m−fee whereClowT=Lower-strike call value at time TCmidT=Middle-strike call value at time TChighT=Higher-strike call value at time TST=Underlying asset price at time TKlow=Lower-strike call strike priceKmid=Middle-strike call strike priceKhigh=Higher-strike call strike priceClow0=Lower-strike call value at position opening (credit received)Cmid0=Middle-strikeTM call value at position opening (debit paid)Chigh0=Higher-strike call value at position opening (debit paid)m=Contract multiplierT=Time of expiration

The following chart shows the payoff at expiration:

Strategy payoff decomposition and analysis of bear call ladder

The maximum profit is unlimited, which occurs when the underlying price increases indefinitely.

The maximum loss is Klow−Kmid+Clow0−Cmid0−Chigh0, which occurs when the underlying price is between the two higher strike prices.

If the Option is American Option, there is a risk of early assignment on the contract you sell.

Example

The following table shows the price details of the assets in the algorithm:

AssetPrice ($)Strike ($)
Lower-Strike call13.80822.50
Middle-strike call15.10825.00
Higher-strike call13.10827.50
Underlying Equity at expiration843.25-

Therefore, the payoff is

ClowT=(ST−Klow)+=(843.25−822.50)+=20.75CmidT=(ST−Kmid)+=(843.25−825.00)+=18.25ChighT=(ST−Khigh)+=(843.25−827.50)+=15.75PayoffT=(Clow0−ClowT+CmidT−Cmid0+ChighT−Chigh0)×m−fee=(13.80−20.75+18.25−15.10+15.75−13.10)×100−1.00×3=−118

So, the strategy loses $118.

The following algorithm implements a bear call ladder Option strategy:

Select Language: 
class BearCallLadderOptionStrategy(QCAlgorithm):
    def initialize(self) -> None:
        self.set_start_date(2017, 4, 1)
        self.set_end_date(2017, 4, 23)
        self.set_cash(100000)
        
        option = self.add_option("GOOG", Resolution.MINUTE)
        self._symbol = option.symbol

        # set our strike/expiry filter for this option chain
        option.set_filter(lambda x: x.include_weeklys().call_ladder(30, 5, 0, -5))

    def on_data(self, slice: Slice) -> None:
        if self.portfolio.invested:
            return

        # Get the OptionChain
        chain = slice.option_chains.get(self._symbol, None)
        if not chain:
            return
        
        # Select the call Option contracts with the furthest expiry
        expiry = max([x.expiry for x in chain])
        calls = [i for i in chain if i.expiry == expiry and i.right == OptionRight.CALL]
        if not calls:
            return

        # Select the strike prices from the remaining contracts
        strikes = sorted(set(x.strike for x in calls))
        if len(strikes) < 3:
            return
        
        low_strike = strikes[0]
        middle_strike = strikes[1]
        high_strike = strikes[2]
    
        option_strategy = OptionStrategies.bear_call_ladder(self._symbol, low_strike, middle_strike, high_strike, expiry)
        self.buy(option_strategy, 1)

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