Ladder Strategy

It’s time to discuss yet another useful strategy used in binary options trading. Like many of the binary options strategies we have discussed, this strategy is actually used in general trading and in other forms of financial market trading. Because of the nature of binary options being a derivative of the markets being traded every day, learning the background of every strategy often turns a binary options trader into an expert market analyst.

This strategy is called the Ladder Strategy. This strategy is credited to IG Markets, one of U.K.’s top provider of contracts for difference (CFD’s) that benefit from competitive margin rates, tight spreads and low commission on over 10,000 markets. Their strategy has been adopted in many financial instruments. Binary options also has an equivalent format of strategy which involves the same mechanisms popularized by IG.

Like the Literal Ladder

Ladder trading, like other strategies, got its name from how it executes. Like a ladder having rungs fixed at equal distances, a ladder arrangement is a type of binary option trade in which the trader is given a range of price levels which may be lined at equal or arbitrary intervals based on market sentiment which are predicted to close higher or lower than the opening price. More simply put, a ladder binary option predicts that that the market has to rise beyond or decline below certain price levels, all while the trade is executing.

What this implies is that for the binary options trader to maximize the profits set for a given trend, several price levels must be set over several periods. It could get confusing, that is why new binary options traders may be advised to study the strategy carefully before proceeding. Since the price levels are arranged like the rungs of the ladder, the asset price has to “climb the rungs” at specified periods to attain a successful trade and obtain maximum profit.

Requires Extensive Analysis

New traders may use this strategy, but is best suited for intermediate to advanced level traders. Because these trades may involve a considerable amount of analysis, it may be tricky for the novice trader to set the price levels. However, the commitment can certainly pay off in the form of higher profits. Each rung can possibly give out a payout that is equal to the payout if only a single option was purchased. This multiplies the possibility of winning by the number of rungs or levels.

Ladder trades will involve an incredibly accurate forecast in order to yield maximum payout. Usually, a ladder is set up to a total of three asset price levels, but this could vary from trader to trader. Each level requires forecast possessing a designated expiry time period. In order to gain, the price must surpass the chosen levels, and all chosen trade levels must make the proper movements within the designated time periods.

Setting Up the Ladder

To set up for a ladder trading, it is important to predict whether the asset price will go down or climb up the ladder. Many indicators can signal this. You can refer to the other articles discussing these. Only by knowing whether there is a long term bullish or bearish trend will this strategy work.

In this method there will be three selections of asset prices. Each one of the selections is actually a predicted price and each predicted price will have its own expiration time.

An Example

We said that setting up a ladder allows for maximum profit and reduced risk. Using an example with two scenarios, let us compare a regular CALL option from a laddered CALL strategy. We shall be able to see how profits can be multiplied by comparing profit and how risk can be reduced by comparing the losses. Again, the price value setups should be researched carefully with the trading period. If you set up the ladder for a day, you should be able to perform analysis on what price levels to include as rungs to your ladder.

This is the first scenario. Say a trader enters a EUR/USD at a strike price of 1.325. He sets an expiry of one hour and places a CALL option for $100. 75% is what the binary option broker pays for in-the-money trades and 15% is what it gives as out-of-the-money rebate. For the purposes of discussion let us say that the trade successfully ends in-the-money at a close price of 1.348. He then gets a profit of $75 from this trade. If the trade would have ended out-of-the money, he would have lost $85. Let’s keep these figures in mind.

If the trader analyses show that there will be a continuous uptrend in that period, and he doesn’t take advantage of it, $75 would be the maximum payout. But what if he took advantage of the different levels of the bullish trend? The second scenario would be this. If a trader has a high confidence level that there will be an uptrend on the price, he could have placed the following laddered configuration:

  • a CALL option for $100 expiring in 15 mins
  • a CALL option for $100 expiring in 30 mins
  • a CALL option for $100 expiring in 45 mins

Given our initial assumptions that the end price of the hour trade is 1.348, all our three trades would have made it in the money if the 15, 30, and 45 minute price levels are higher than our strike price of 1.325. That calculates to three times the original profit of $85, or a total profit of $255. This profit is $170 more than our first scenario. It shows that the ladder strategy does have the potential to multiply profits.

As for risk reduction here is how we may analyze the computation for loss. If for example, the end of the hour trade is out of the money because of some glitch in the trader’s research, the attention required to monitor all the other price levels and other expiry times should be able to earn you some profit and reduce the risk. In other words, if the 30-minute and 45-minute trades ends out of the money, the analysis required to correctly predict the 15 will allow you to cut your losses.

To calculate this, the trader could have one successful trade resulting to an $85 profit subtracted from the loss of two unsuccessful trades with losses adding up to $150, resulting to a total loss of $65. This is $10 less than the initial $75 loss we computed in the first scenario. Computing further to the two successful — one successful trade combination will even result in a $95 profit. This shows that a ladderized CALL option would have reduced the trader’s risk.

Many may argue that the investment is directly proportional to the profit, meaning the more you want to earn, the more you should invest. This is particularly true. But the cumulative profit from continuous earnings of each round can well compensate for the increase of investment, given all conditions are ideal and the proper up or down trend is predicted correctly. The ladder strategy is considered a long-term strategy because of this.

Practice a ladder approach on one of the demo accounts of top binary brokers that we have compiled for you. Meanwhile, read on through our other articles to learn more strategies in trading binary options.

Read more articles on Strategy.

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