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 l𝓰evels before the option expires. Ladder options come in put andღ call varieties.

Do not confuse ladder options, which are specific types of 澳洲幸运5开奖号码历史查询:options contracts, with long call ladders, long put ladders, and their short counterparts, which are options strategies that involve buying and selling multiple options co🌜ntracts 🍨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 澳洲幸运5开奖号码历史查询:underlying asset at a predetermined price at or by a predetermined date. However, a ladder option adds a feature that allows the h🌺oldꦍer 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 澳洲幸运5开奖号码历史查询:expiration.

Because the holder earns non-returnable partial profits as the trade develops, total risk is much lower than for traditional 澳洲幸运5开奖号码历史查询:vanilla options. The trade-off, of course, is that ladder optꦜions are more expensive thಞan similar vanilla options.

Example of a Ladder Option

Consider a ladder 澳洲幸运5开奖号码历史查询:call option where the underlying asset price is 50 and the 澳洲幸运5开奖号码历史查询: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 澳洲幸运5开奖号码历史查询:time value associated with ladder options. Therefore, the traded price for call options is usually above the 澳洲幸运5开奖号码历史查询: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 ru𒁏ng and reach the next rung.