finance Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fina ...

, a ladder, also known as a Christmas tree, is a combination of three options of the same type (all

call Call or Calls may refer to: Arts, entertainment, and media Games * Call, a type of betting in poker * Call, in the game of contract bridge, a bid, pass, double, or redouble in the bidding stage Music and dance * Call (band), from Lahore, Paki ...

s or all puts) at three different

strike price In finance, the strike price (or exercise price) of an option is a fixed price at which the owner of the option can buy (in the case of a call), or sell (in the case of a put), the underlying security or commodity. The strike price may be set b ...

s. A long ladder is used by traders who expect low volatility, while a short ladder is used by traders who expect high volatility. Ladders are in some ways similar to strangles,

vertical spread In options trading, a vertical spread is an options strategy involving buying and selling of multiple options of the same underlying security, same expiration date, but at different strike prices. They can be created with either all calls or all ...

condors Condor is the common name for two species of New World vultures, each in a monotypic genus. The name derives from the Quechua ''kuntur''. They are the largest flying land birds in the Western Hemisphere. They are: * The Andean condor (''Vult ...

, or

ratio spread A Ratio spread is a, multi-leg options position. Like a vertical, the ratio spread involves buying and selling options on the same underlying security with different strike prices and the same expiration date. In this spread, the number of option ...

s. A

long Long may refer to: Measurement * Long, characteristic of something of great duration * Long, characteristic of something of great length * Longitude (abbreviation: long.), a geographic coordinate * Longa (music), note value in early music mens ...

call ladder consists of buying a

at one strike price and selling a call at each of two higher strike prices, while a long put ladder consists of buying a put at one strike price and selling a put at each of two lower strike prices. A

short Short may refer to: Places * Short (crater), a lunar impact crater on the near side of the Moon * Short, Mississippi, an unincorporated community * Short, Oklahoma, a census-designated place People * Short (surname) * List of people known as ...

ladder is the opposite position, in which one option is sold and the other two are bought. Often, the strike prices are chosen to make the ladder

delta neutral In finance, delta neutral describes a portfolio of related financial securities, in which the portfolio value remains unchanged when small changes occur in the value of the underlying security. Such a portfolio typically contains options and their c ...

. All three options must have the same

expiry date An expiration date or expiry date is a previously determined date after which something should no longer be used, either by operation of law or by exceeding the anticipated shelf life for perishable goods. Expiration dates are applied to selecte ...

. The term ''ladder'' is also used for an unrelated type of

exotic option In finance, an exotic option is an option which has features making it more complex than commonly traded vanilla options. Like the more general exotic derivatives they may have several triggers relating to determination of payoff. An exotic opt ...

, and the term ''Christmas tree'' is also used for an unrelated option combination similar to a

butterfly Butterflies are insects in the macrolepidopteran clade Rhopalocera from the Order (biology), order Lepidoptera, which also includes moths. Adult butterflies have large, often brightly coloured wings, and conspicuous, fluttering flight. The ...

Examples

For example, a trader might construct a long call ladder by buying one

with a

of 90, selling one call with a strike price of 95, and selling another call with a strike price of 105, all expiring on the same date. This would yield a limited loss if the options expire with the

underlying In finance, a derivative is a contract that ''derives'' its value from the performance of an underlying entity. This underlying entity can be an asset, index, or interest rate, and is often simply called the "underlying". Derivatives can be use ...

near or below 90, a large loss if the options expire with the underlying far above 105, and a limited profit if the underlying is near or between 95 and 105. A trader might construct a long put ladder by buying one put with a strike price of 110, selling one put with a strike price of 105, and selling another put with a strike price of 95 (again, all expiring on the same date). This would yield a limited loss if the options expire with the underlying near or above 110, a large loss if the options expire with the underlying far below 95, and a limited profit if the underlying is near or between 95 and 105. A

ladder is the opposite position of a long ladder. Thus, for the first example above, the corresponding short call ladder would involve selling a 90 call, buying a 95 call, and buying a 105 call. For the second example, the corresponding short put ladder would involve selling a 110 put, buying a 105 put, and buying a 95 put.

Terminology

The different types of ladders have alternative names: * A long call ladder is also called a bull call ladder. * A short call ladder is also called a bear call ladder. * A long put ladder is also called a bear put ladder. * A short put ladder is also called a bull put ladder. A ladder can be seen as a modification of a

bull spread In options trading, a bull spread is a bullish, vertical spread options strategy that is designed to profit from a moderate rise in the price of the underlying security. Because of put–call parity, a bull spread can be constructed using either p ...

or a

bear spread In options trading, a bear spread is a bearish, vertical spread options strategy that can be used when the options trader is moderately bearish on the underlying security. Because of put–call parity, a bear spread can be constructed using either ...

with an additional option: for instance, a bear call ladder is equivalent to a bear call spread with an additional long call. A bull put ladder is equivalent to a bull put spread with an additional long put. These terms can be confusing, as they do not correspond to the usual concepts of "

bullish Market sentiment, also known as investor attention, is the general prevailing attitude of investors as to anticipated Market trends, price development in a market. This attitude is the accumulation of a variety of fundamental analysis, fundamenta ...

" and "

bearish Market sentiment, also known as investor attention, is the general prevailing attitude of investors as to anticipated price development in a market. This attitude is the accumulation of a variety of fundamental and technical factors, including ...

" in finance. For instance, a ''bear'' call ladder is in fact an overall ''bullish'' strategy.

Characteristics

A long ladder is similar to a short strangle but with limited risk in one direction (the downside for a call ladder and the upside for a put ladder), while a short ladder is similar to a long strangle but with limited profit potential in one direction (again, the downside for a call ladder and the upside for a put ladder). A ladder is also similar to a

condor Condor is the common name for two species of New World vultures, each in a monotypic genus. The name derives from the Quechua ''kuntur''. They are the largest flying land birds in the Western Hemisphere. They are: * The Andean condor (''Vult ...

, the key difference being that a condor has an additional option; for example, a long call condor is similar to a long call ladder but with an extra call at a higher strike. A ladder's

Greeks The Greeks or Hellenes (; el, Έλληνες, ''Éllines'' ) are an ethnic group and nation indigenous to the Eastern Mediterranean and the Black Sea regions, namely Greece, Cyprus, Albania, Italy, Turkey, Egypt, and, to a lesser extent, oth ...

are generally similar to a strangle. Generally, a short ladder is long gamma, short theta, and long vega, while a long ladder is short gamma, long theta, and short vega. A short ladder has limited risk and unlimited potential profit, while a long ladder has unlimited risk and limited potential profit. A ladder has two

break-even point The break-even point (BEP) in economics, business—and specifically cost accounting—is the point at which total cost and total revenue are equal, i.e. "even". There is no net loss or gain, and one has "broken even", though opportunity costs ha ...

Execution

Because a ladder is a somewhat complex

spread Spread may refer to: Places * Spread, West Virginia Arts, entertainment, and media * ''Spread'' (film), a 2009 film. * ''$pread'', a quarterly magazine by and for sex workers * "Spread", a song by OutKast from their 2003 album ''Speakerboxxx/T ...

, it may not be listed directly on

electronic exchange In chemistry and physics, the exchange interaction (with an exchange energy and exchange term) is a quantum mechanical effect that only occurs between identical particles. Despite sometimes being called an exchange force in an analogy to classica ...

s, so traders wishing to trade one may need to make two or three transactions to construct the position, or communicate with a

broker A broker is a person or firm who arranges transactions between a buyer and a seller for a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal. Neither role should be confu ...

market maker A market maker or liquidity provider is a company or an individual that quotes both a buy and a sell price in a tradable asset held in inventory, hoping to make a profit on the ''bid–ask spread'', or ''turn.'' The benefit to the firm is that it ...

to specify the desired trade.

References

{{Derivatives market Options (finance)