Profiting from the Long Call Synthetic Straddle

The best way to think of the long call synthetic straddle is as a means of doubling your potential profits. This is achieved by the simple expedient of purchasing enough at the money calls to cover twice the number of shares shorted. That means a trader would have to purchase two calls for 100 shares.

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The long call synthetic strategy is a very risky play, but it is potentially a very profitable one. As with long call strategies, the maximum profit is theoretically unlimited. The profit is achieved when the price of the underlying stock exceeds the strike price of the long call minus the net premium or the sale price.

Obviously, the long call synthetic straddle is a very complex strategy, which means that there’s a lot that can go wrong with it. The maximum loss occurs when the underlying asset trades below the strike price of the call options. Unfortunately, there are several other points at which losses can occur.

Double the Risk Double the Profit Potential

The appeal of the long synthetic call is an obvious one; a trader can theoretically double his or her profit by employing it. Unfortunately, the risks are also doubled.

A person should only employ this strategy when he or she has quite a lot of extra money to risk in the market. If you cannot afford to lose money, you should stay away from this call strategy.

Yet if you have some extra cash, you can profit handsomely. It is theoretically possible to make four times your investment by employing this variation on the straddle.

When to Use the Long Synthetic Straddle

The long synthetic straddle works best with undervalued stocks in a bull market. It is usually employed when a trader believes that a particular asset is underpriced but about to go up in price in coming months.

The strategy works best with a steady rise in price, but a trader that can move fast can profit from sudden movements. The volatility of today’s market makes this strategy ideal, particularly with the large number of undervalued stocks.

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The danger, of course, is from a bear market or a failure to rise in price. If a stock sits at the price, the straddle will not work.

For the long synthetic straddle to work, the trader may need to schedule movements several months in advance. A person might employ the straddle to coincide with the release of news that can boost a stock’s value such, as an earnings report or news about a dividend.

A Stock Picker’s Strategy

The long synthetic straddle is definitely a stock picker’s strategy. It is often used to finance purchases of shares that a trader believes will have long-term value. It may also be used to take advantage of an undervalued stock.

As with most long strategies, this kind of straddle will not work in a bear market. It won’t work in the bear market because the stock movements will not generate the kind of profit needed to purchase more shares.

The long synthetic straddle is an excellent play to use with trading robots. The robots are in a better position to take advantage of the movement than a human trader.

A great advantage to trading robots is that the long straddle player can schedule strikes months in advance. That obviously increases the risk, but it can increase the potential profit. A long synthetic straddle executed through a trading robot would be an ideal means of taking advantage of today’s bull market.

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Understanding the Long Call Condor

The long call condor is one of many trading plays designed to reduce risk by combining two strategies in one. Some options call the long call condor a non-directional strategy because it contains both a lower in the money call and a higher out of the money call.

The big drawback to the long call condor is that like many non-directional strategies, it offers a limited profit. The risk is limited, but so is the potential profit. A person that employs this strategy will usually make some money, but he or she will not make that much money.

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That makes the long call condor an extremely conservative strategy that is favored by conservative traders. One way to think of it is as an options play with a belt in hedge.

Profit and Loss from a Self-Financing Strategy

A classic long call condor unfolds like this:

  1. The trader sells one in the money call.
  2. The trader buys one in the money call at the lower strike.
  3. The trader sells one out of the money call.
  4. The trader buys one over the money call at the higher strike.

The idea here is that the in the money calls will finance the price of the sell. This strategy is often deployed by traders that are trying to purchase a low-priced stock.

The trader makes money from the difference between the price of the two calls. The trader can only make money if the out of the money strike is higher than the in the money strike. The maximum profit is the amount gained from the strikes minus the premium and the commissions paid.

The major reason to undertake a long condor option strategy is to limit risk. The trader is trying to avoid debt by limiting both the risk and the costs.

When to Use the Long Call Condor

The long call condor is best deployed when volatility is limited. Like most non-directional strategies, the long call condor can be easily undermined by volatility.

Any sudden movement, particularly upwards, will take the profit out of the long call condor. That means the long call condor is not a good strategy to deploy in a bull market or stocks with a history of volatility.

Like a lot of non-directional strategies, the long call condor is often deployed with indexes; historically stable stocks like blue chips and small-cap stocks. It often works better with those equities that the market and the news media pay little or no attention to.

Not for Today’s Market

In today’s highly volatile market, it would be a good idea to avoid non-directional strategies. In recent years both the S&P 500 and the Dow have been subject to sudden movements. These movements are largely propelled by the volatility of tech stocks and the attention focused on a few high value equities such as Google, Apple, MasterCard, Amazon.com, and Netflix.

The volatility is made worse by external conditions, such as high inflation, that drive investors to focus on certain sectors, such as tech and online retail. That makes it difficult to implement non-directional strategies.

There are a few niche areas, such as small caps, where the long call condor is appropriate. Only experienced traders with a lot of knowledge about the market should deploy the long call condor. The risk from this strategy is greater than many traders assume.

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Taking Advantage of the Short Straddle

The short straddle is known as a neutral options or non-directional options strategy because it is designed to make money whether a share price rises or falls. That means the short straddle is neither a bull nor a bear strategy.

ShortStraddle

Also known as the sell straddle and the naked straddle sell, the short straddle involves two sells at once. The traditional short straddle utilizes one at the money call option and one at the money put that are executed at the same time. This effectively gives both moves the same striking price and expiration date.

The idea here is to make a modest profit whether the share price goes up or down. The strategy is designed to compensate for uncertainty but not for volatility. Something to be aware of is that the sell straddle will only work if volatility is limited; if the share price makes a sudden up or down movement, the trader will lose all of his or her money.

Designed for Uncertainty

A lot of traders dislike the short straddle because it involves limited profit and unlimited loss. If the share price moves too much, the investor will lose the premium and the commissions.

The reason the naked straddle sell is so attractive is that it provides two breakeven points. The upper point is reached when the strike price of the short call and the net premium is reached. The lower breakeven point is reached when the strike price of the short put and the net premium is reached.

The time to use the short straddle is when you are certain volatility will be limited but are uncertain of the direction of movement. Many traders will employ this strategy at times of the year when movement is limited.

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The short straddle is often used when knowledge about stocks is limited; for example, in a sector with which the trader is unfamiliar with. Traders may also use this kind of straddle when a company deliberately limits some of the information available to investors.

When to Use the Short Straddle

It is best to use the short straddle with stocks with a history of limited movement. An example of these might be blue chips or stocks in a sector with which the market takes little interest, such as low end retail.

The sell straddle works with shares that generate little news or media interest. If a company is generating a lot of interest or attention, it is best to avoid using the short straddle. Media interest often leads to market interest, which leads to volatility.

That means you should not use the short straddle on “hot” tech stocks such as Tesla, which can move suddenly. On the other hand, it often works well with small caps in industrial or mining sectors.

You should be very careful about employing the short straddle because of the high risks associated with it. Conditions have to be right for this strategy to work.

Obviously, persons that cannot afford to lose money should not employ the short straddle. It is simply too risky; on the other hand, the short straddle can pay off for those willing to take the risks.

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Soaring with the Short Call Butterfly

Legendary boxer Mohammad Ali often boasted of floating like a butterfly and stinging like a bee. Ali’s colorful phrase could easily be used to describe the short call butterfly, a triple strategy in which a trader tries to profit from three different strikes.

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The strategy is called a butterfly because it is shaped like one. Like most short strategies, this variation on the butterfly requires careful timing to be successful. To make a profit, underlying share price has to be outside the wings of the butterfly at expiration. That means the share price has to be over the breakeven point when the options expire.

The short call butterfly is a momentum-based strategy that tries to use the first strike to finance the rest of the play. The positive cash flow is supposed to occur up front and drive a second front.

Limited Profit and Loss

Even though it is a little complex, the short call butterfly is actually a pretty conservative and cautious strategy. The potential loss is pretty limited, but so is the potential profit.

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The risk is limited by having three strike points that are close together. The profit is limited because the strategy expires fairly quickly.

There are many variations on the short call butterfly; a popular one is to use it to buy dividend stocks. The option gets exercised when the stock pays a dividend. A trader might execute this strategy at a time when management historically declares a dividend.

A Cautious Strategy

Since this is a cautious strategy, it is best utilized with stocks that don’t have a history of volatility. It wouldn’t work with small cap stocks or with speculative growth stocks, such as tech stocks. Instead, it works better with blue chips and with indexes that aren’t subject to volatility.

Obviously, one of the great risks you face with the short call butterfly is sudden volatility. Any fast movement, whether up or down, will prevent this strategy from working.

The maximum total loss would be the premium and trading cost. Therefore it is always a good idea to execute this strategy with a low-cost brokerage. Trading fees can quickly eat up all of the profits from a short call butterfly.

Use after a Big Price Swing

There are different schools of thought on the short call butterfly. A popular one is that the best time to use it is after a big price swing or at the beginning of a bull market.

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When a trader employs the short call butterfly at that time, he or she is essentially betting against volatility. The trader is betting that the market, or at least that particular issue, is settling down. Obviously this strategy won’t work if the issue starts moving suddenly.

That means the short call butterfly might not be that good a strategy to employ in today’s volatile market. It might work better with issues from foreign stock markets such as Germany, Canada, or Australia that are historically more stable than the U.S. stock markets.

The current U.S. stock market seems a little too volatile for the short call butterfly. Although, it might be possible to identity individual issues that it might work with.

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Climbing the Bull Put Ladder

The bull put ladder, also known as the short put ladder, is a popular strategy because it can produce unlimited profit with a limited risk if it works. Like most short call strategies, the short put ladder is designed to take advantage of volatility.

BullPutLadder

This play is called a ladder because it involves a series of three puts in a row. To execute it you would first buy an out of the money put, then execute an ATM or at the money put at the breakeven point, and finally cash in with an in the money put at a higher strike point.

Calculating the profit from the bull put ladder is pretty simple. All you have to do is subtract the strike price of the short, or out, of the money put from the long, or in, the money put. The net profit is what you will make after subtracting the commissions from the amount left over.

Why It’s a Bull Strategy

The short put ladder is considered a bull strategy because it is designed to use the momentum generated from a bull market or a rising stock to generate the profit. As with all bull strategies, it only works when the equity goes up in price; if the equity falls, it won’t work.

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The risk is limited because the maximum loss is the strike price of the short put and the commissions paid. The potential profit can be unlimited because the ITM put occurs when the price can be above the breakeven amount.

A good way to think of the bull put ladder is as two strategies in one. It is basically an in the money put added to the classic bull put spread in an attempt to get a higher breakeven point.

When the Bull Put Ladder Will Work

The bull put ladder works best with fast rising shares in a very volatile market. That’s why it is so popular right now. The trader can make a quick profit without subjecting herself to the long-term risk of a bear market.

Some traders will use a bull put ladder to generate quick profits in a volatile market. They want to make money from the market, but they don’t want to be in it because of the long-term risks.

The bull put ladder is one of many options trading strategies used by those that want to avoid the risks and hassles associated with stock ownership but want to profit from market volatility. This strategy is popular with those that have no faith in the market but want to make some money from it.

Volatility Required

The bull put ladder is a classic volatility strategy that means it is designed to minimize the risks from volatility while maximizing the potential profit from a volatile market. The bad news is that it can only work in a volatile bull market.

The bull put ladder can also work in a volatile market if you can pick a stock that’s going to increase in value. That means you need to be sure that the share price will rise quickly before employing the short put ladder. If the share price doesn’t go fast, it won’t generate the momentum needed to profit from the bull put ladder.

Since striking fast is required for successful execution of the bull put ladder, it is a great strategy to employ with trading robots. The robots can make the fast movements needed to put this strategy into action.

Another good word of advice here: It’s always a good idea to practice volatility strategies a few times with virtual trades before you implement them. That way you can determine if the strategy is for you and if you can live with the risks inherent in executing volatility-based options strategies.

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Taking a Chance on the Bull Put Spread

A bull put spread is a credit spread that an investor employs when he or she thinks that an equity is about to display a modest rise in value. It’s a conservative bull strategy that consists of one out of the money put and one in the money put that is set above the market price of the asset.

The idea behind the bull put spread is that the value of the asset will rise to the strike price and cover the cost of the trade while producing a modest profit. The strategy is popular because it is simple and conservative, but there’s more inherent risk to it than many people believe.

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Risks to the Bull Put Spread

The two biggest risks to the bull put spread are:

  • A sharp rise in the equity’s share price well above the strike price.
  • Any fall in the equity’s share price, particularly a sudden fall.

Bull put spreads are vulnerable to sudden rises in share values because the maximum profit you can make is the net premium and commissions paid. This can only occur when the strike price hits the short put. When the strike price is higher than the put price, the option becomes worthless, and you lose your investment.

Therefore a good way to think of the bull put spread is that you are betting on a limited movement in share price. That movement, though, has to be in one direction at a steady pace.

The bull put spread is actually a tricky options strategy because it has to be exactly on. Like many options strategies, the bull put spread is a market timing strategy. You’re trying to pick the exact time to make a move.

When to Use the Bull Put Spread

You should only employ the bull put spread when you can afford to lose the premium and the commission. If you cannot afford to lose the premium or the commission and you cannot live with only the profit, you should avoid this strategy.

If you have a few extra dollars to play around with, the bull put spread can make a short-term profit. One thing you will need for the bull put spread is confidence in your trading strategy; if you don’t have that, you won’t be able to sleep with this strategy.

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The bull put spread is best employed with equities with steady but limited growth potential. An example of these might be blue chips or oil companies. Old and established companies with a steady history of growth, such as Wal-Mart, IBM, or Exxon-Mobile, work well with the bull spread. Businesses with a history of a lot of growth or loss, such as Apple or Amazon.com, should be avoided.

Something to be careful about with this spread is bull markets. Even though it’s a bull strategy, the bull put spread can backfire in a bull market. If the entire market or index starts moving upward, it can quickly push your stock over the strike price.

That means it is a good idea to avoid the bull put spread during times of sudden market movement. Examples of such times include the days upon which economic news is released and when earnings reports come out.

In today’s erratic market, the bull put spread should only be carefully used. It is a strategy designed for a steady market, which is far from what we have today.

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Taking a Chance with the Diagonal Spread

The diagonal spread is one of the most elaborate options trading strategies around. It’s also one of the most unique because a diagonal spread involves purchasing two different options on the same security.

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Even though both options employ the same basic strategy, they have different strike prices and different expiration months. The reason for this is to limit risk through diversification. The trader is attempting to increase his or her chances of making a profit by scheduling different strikes at different times.

They call it a diagonal spread because it combines a vertical spread with a horizontal spread. The idea is to use two different strategies to maximize profit and minimize risk.

The diagonal spread is similar to the calendar spread; the difference is that the diagonal spread is carried out over a shorter period of time. A calendar spread might be scheduled over several months; a diagonal spread usually involves two months.

A Complex Trading Strategy

The diagonal spread can quickly get very complex because there are several variations on it. The diagonal bull spread is designed to take advantage of a bull market by scheduling a higher call in the near future and a lower call later on. The opposite of that is the diagonal bear spread in which lower strikes are scheduled first.

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As you can see, the diagonal spread is all about the timing. A person who implements one is betting that a bear or a bull market will begin or end within a specific timeframe.

The danger here is that the investor’s timing is off. The diagonal spread is designed to lessen the risks of market timing by scheduling two strikes. That doubles the investor’s chances of making the right call.

How the Diagonal Spread Works

A typical example of the diagonal spread would be two put options with different strike prices on the same share. The strike price is different in an attempt to take advantage of market volatility.

A person might schedule a lower price in the near future and a higher price later on an equity he thinks is undervalued. The same person might reverse the order on an equity that he believes to be overvalued.

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Making the Long Put

The best way to think of the long put is that it is a bet that a particular equity is about to undergo a sudden drop in value. The strategy is a highly speculative one that entails a lot of risk.

The long put is actually a fairly simple trade in which the investor purchases an option and holds it until the share price falls to a certain value. The risk inherent in the long put is an obvious one: The trader makes no money if the share value doesn’t fall to the strike price or starts to rise.

LongPut

That means the long put is actually a very risky move even though it is a bullish strategy. The trader has to strike at exactly the right moment, which makes this an excellent play for those using trading robots.

An Alternative to Selling Short

Many traders regard the long put as a good alternative to selling a stock short. The reason they prefer the long put is that it enables them to profit from sudden drops in value without actually buying the equity.

The long put also provides the investor with more liquidity to take advantage of other deals in the market. That makes the long put a favorite of traders with limited amounts of capital.

As with selling short, the long put is all about the timing. If you don’t strike at the right time, you won’t make money.

Some traders also regard the long put as being more convenient than selling short. The reason for this is that the options are usually cheaper than the actual share price. An investor doesn’t have to tie up a large percentage of her cash in the shares.

The risk from the long put is more limited than with selling short, but it is substantial. It is entirely possible not to make any money when you use the long put.

An Unlimited Potential Profit

Theoretically, the long put provides an unlimited potential for profit if it works. That’s why so many investors are willing to risk this strategy.

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The breakeven point for the long put is reached when the strike price and the share price exceed the premium paid. Something to be aware of is that the investor might not achieve the uneven profit even if the breakeven point is reached.

The reason for this is the direction the shares are moving in. If they start going up, the investor can still lose money after hitting the breakeven. The trader will only make money if the shares get sold at the breakeven point.

When and Where to Use the Long Put

The long put is best used on highly speculative stocks with a lot of trading volume. An example of this might be a technology stock where the share value is highly dependent upon favorable news.

A trader that thinks that the technology company’s new product might be delayed because of design flaws could use the long put to take advantage of that bad news. As always, the trader runs the risk that the news will be good and the share prices will start rising.

The long put also works very well with overvalued equities such as indexes and hot technology stocks. If you think that a particular stock is overvalued, you can use the long put to take advantage of it.

Even though it’s a bearish strategy, the long put may not work in a bear market when everybody is betting against the market. The long put works best in a bull market when enthusiastic investors are pushing prices to unrealistic levels. In such a climate of irrational exuberance, the long put trader can make a killing.

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Using the Strap

The Strap, which is sometimes called the Triple Option is a high–profit, limited-risk strategy that is actually a modification of the Straddle. Like the Straddle, the Strap involves a combination of calls and puts designed to maximize profit in a bull market while minimizing risk.

The Strap is considered a low-risk strategy because the maximum loss the trader can suffer is the net premium and the commissions paid. The maximum gain is unlimited because the option’s value is based on the underlying stock price at the strike of the call and put options.

How the Strap Works

 Strap

In the Strap, a trader purchases a number of options on the same stock with different striking prices and expiration dates. Each of these strikes is designed to take advantage of the prices the trader thinks the stock will rise to.

The big drawback to the Strap is that it will only work with rising share prices in a bull market. If the share prices start to fall or a bull market sets in, the Strap will not work. The Strap won’t work if the share prices don’t rise.

The advantage to the Strap is that the potential profit is determined by the share price. That makes the Strap very useful in today’s market, where a few super stocks such as Google and Amazon.com have risen to incredible share prices.

The Strap is very popular in volatile markets because it minimizes losses with two breakeven points. Once the breakeven points have been reached, any gains over them are pure profit.

Who Should Use the Strap?

A major limitation to the Strap is that is you will need to make a fairly large cash outlay for it to work. The Strap is not a self-financing strategy even though it is a high-profit maneuver.

Investors with a lot of cash like the Strap because it maximizes potential profits while minimizing risk. Those with limited funds will be better served by more complex moves, such as the Bull Call Ladder, which try to use the volatility generated by bull markets to finance a portion of the trade.

Small-time investors should stay away from the strap because of the cash outlay required. Instead, they stick to more basic strategies such as the long call or the short call. Persons who need to raise large amounts of cash will need to use riskier strategies.

Short strategies often work better for smaller traders because they provide a higher degree of control. Persons who cannot afford to lose control of funds should definitely avoid the Strap.

A Volatility Strategy

The Strap is very popular today because it is a strategy designed to take advantage of volatility, particularly the sudden and often unpredictable increases in share value that certain companies experience.

The Strap is a very good way to take advantage of highly speculative stocks, such as those in tech companies. It also works well for closely followed and widely held equities that are more subject to sudden shifts in the market.

Volatility is the Strap’s strength, but it is also its weakness; if a stock experiences a sudden price drop, the Strap fails. The Strap attempts to compensate for sudden turns with a low breakeven point that serves as a sort of stop loss. The option price cannot fall below a certain level.

The Strap is definitely a bullish strategy because it only works when equities are increasing in value. That means it can be a very dangerous strategy in an uncertain economy when any political or economic news can trigger a bear market. Yet those that are willing to embrace the Strap can make a lot of money in a volatile market.

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The Bull Call Ladder Explained

The bull call ladder or long call ladder is an attempt to finance a second trade by shoring another call in the bull call spread. It’s called a ladder because one trade builds on another.

This is a rather complicated strategy with limited profit potential but a lot of risk. It’s usually used by traders with limited financial resources that need a strategy that can finance itself. The risk, of course, is that the strategy won’t work and the trader will end up having to pay the premiums.

Setting Up the Bull Call Ladder

A trader sets up the bull call ladder by buying an option on a stock that he thinks has little or no volatility but is poised to rise. The trader then sets up two strikes, one lower and one higher. The lower strike is supposed to finance the higher priced strike.

BullCallLadder

This strategy is designed to take advantage of a bull market and use the bull momentum to finance trades. Obviously, the biggest risk here is a bear market or a sudden fall in value. If the stock suddenly becomes volatile, the bull call ladder will not work.

As with other bull strategies, this play can be thought of as a bet against volatility. It works best with traditionally stable stocks like those on the Dow Jones. The bull call spread can also be used with indexed exchange traded funds, particularly S&P indexes.

Many people like this strategy because it has two potential breakeven points. Each of the breakeven points is supposed to pay net premium. Unlimited losses will result if the share price drops below the lower breakeven point or rises above the upper breakeven point.

Who Should Employ the Bull Call Ladder?

The bull call ladder should only be employed by those who are willing to lose money because it is such a risky strategy. Persons with limited amounts of cash should stay away from it because it is so easy to lose money.

The low profits can also be a problem if a trader is paying high commissions on his options. For this strategy to work, you will have to locate a brokerage that offers fairly low commissions.

In today’s market, it’s a good idea to stay away from the bull call ladder because stocks are just too volatile. The sudden movements of many shares and the constant rises in price make it just too hard to employee the bull call ladder.

Interestingly enough, the very conditions that make it hard to use the bull call ladder actually favor a similar strategy called the short call ladder. The short call ladder is simply the bull call ladder in reverse and works well when there are large price movements.

How to Minimize Risks with the Bull Call Ladder

The only way to minimize the risks inherent in the bull call ladder is to carefully pick the stocks you are using. You will have to be very certain that there will be no sudden movement, particularly in price gains.

That means you should stay away from popular stocks that are getting a lot of news coverage. Shares that receive a lot of news coverage become very volatile because the news coverage often drives irrational buying or selling of a particular stock. The recent frenzy around Apple and Tesla is an example of this phenomenon.

Stocks that receive less attention from the media, such as energy or mining stocks, might work better for the bull call ladder. Unfortunately, any company can be the subject of destructive media attention in today’s environment.

Novice traders in particular should stay away from the bull call ladder because of its complexity. Although, veteran traders can utilize it in specific situations.

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