Learn how to pay for vertical spreads using an option ladder strategy

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A ladder option is an exotic option that locks in partial profits once the underlying asset reaches predetermined price levels or "rungs. Ladder options come in put and call varieties. Do not confuse ladder options, which are specific types of options contractswith long call ladders, long put ladders, and their short counterparts, which are options strategies that involve buying and selling multiple options contracts simultaneously.

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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 underlying asset at a predetermined price at or by a predetermined date.

However, a ladder option adds a feature that allows the holder 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.

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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 expiration. Because the holder earns non-returnable partial profits as the trade develops, total risk is much lower than for traditional vanilla options.

Ladder option | The Financial Engineer

The trade-off, of course, is that ladder options are more expensive than similar vanilla options. Rungs are set at 60, 65, and If the underlying price reaches 62, the profit locks in at option ladder on news rung minus strike or 60 - If the underlying reaches 71, then the locked in profit increases to 15 new rung minus strike or 70 - 55even if the underlying falls below these levels before the expiration date.

Learn how to pay for vertical spreads using an option ladder strategy.

As with vanilla options, there is time value associated with ladder options. 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. Compare Accounts.

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