Strategies · Library · Options
§2.16Volatility
Bear call ladder
Sell a call near the money, buy a call at a higher strike, and buy another higher still. It starts as a bearish credit spread and turns into a bet on a large rally.
- Asset class
- Options
- Held for
- To expiry
- Data
- ARCANE has part of the data
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Turns bullish: wants a big rise to pay and fears the stock ending between the strikes.
- Entry and exit
- Sell a near-the-money call, buy two higher-strike calls, same expiry. Usually adjusted from a losing bear call spread. Close at expiry or when the stock falls back.
- Sizing
- 1:1:1 (one short call, two long calls at higher strikes)
How it fails
- Maximum loss capped, located between the two higher strikes
- Gain is unlimited above the upper breakeven
- Small credit or small loss if the stock stays low
- Long calls decay with time
Data it needs
- options chain with strikes and premiums
- implied volatility by strike and expiry
- underlying daily price
ARCANE has the underlying daily close but no options chains, strikes or implied volatilities
How ARCANE uses it
Matches a Call that a price breaks upward past a level, a large-move bullish tail. Paper only.
Short and long call mix cannot be built.
Filed under the volatility card
Hold less after a month of high volatility and more after a calm one. The paper found this raised return per unit of risk, because volatile spells are not paid for with higher returns.
A paper plan from this card holds 5 to 63 days, stops at 2.5× the expected move and uses at most 50% of your risk budget. The card
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §2.16, p. 24 of the SSRN version. Described in our words. Volatility is ARCANE’s filing, not the book’s.