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Long Put Ladder - An Option Trading Strategy

In this article, we shall discuss the long-put ladder option strategy. This is the strategy traders use to benefit from the bearish market. In this strategy, traders use a series of put options with different strike prices and sell more put options at the lower strike price.


The intention behind using the strategy is to limit the potential losses, along with maintaining the ability to profit from the downward trend. This strategy may be complex for beginners and should be implemented very carefully.


Breakeven points of the strategy:

  • The long put ladder is the extended version of the bear put strategy, with the only difference of the one extra put contract sold.

  • The reason for selling one extra put contract is to reduce the overall premium cost.

  • When traders are expecting the downfall trend in the market of that underlying asset, till the lowest strike price, in such cases, a long put ladder option strategy is best to use.

  • When there is low implied volatility in the market, use this strategy to profit.

  • The main reason of this strategy is to predict the underlying asset's price correctly till its expiry and gain profit by utilizing the time decay factor.

Highest reward on the strategy:

The long-put ladder option strategy offers limited rewards. It does not have the potential to earn unlimited money. But by implementing this strategy, you can save yourself from the potential losses.


How to enter the long-put ladder strategy?

A long put ladder can be created by buying one In-the-money put option, selling one at-the-money put option, and selling one more out-of-the-money put option contract having the same underlying asset and the expiry time. Traders may choose different strike prices for all the contracts.


Break Even point of long put ladder strategy:

The long put ladder options strategy will have two breakeven points, as follow:

  • Upper breakeven point = Strike price of long put contract - the net premium paid.

  • Lower breakeven point = Total strike price of short puts + total premium paid.


How to exit from a long put ladder strategy?

To exit from the strategy, you must sell the put option contracts at a higher price than you bought.


Illustration

Eg. Nifty is currently trading @ 5500. Buying Put Option of Nifty having Strike 5600 @ premium 140, selling Put Option of Nifty having Strike 5400 @ premium 60 and selling Put Option of Nifty having Strike 5500 @ premium 100 will help investor benefit if Nifty expiry happens between 5400 and 5600.

Strategy

Stock/Index

Type

Strike

Premium Inflow

Long Call Ladder

NIFTY (Lot size 50)

Sell Put

5400

60 (Inflow)

Sell Put

5500

100 (Inflow)

Buy Put

5600

140 (Outflow)

The Payoff Schedule and Chart for the above is below.


Payoff Schedule

NIFTY @Expiry

Net Payoff (Rs.)

5100

-9000

5200

-4000

5280

0

5300

1000

5400

6000

5500

6000

5600

1000

5700

1000

5800

1000

5900

1000

6000

1000


Long Put Ladder - An Option Trading Strategy

In the above chart, the breakeven happens the moment Nifty crosses 5280 (since net inflow is ₹20). The risk in such a strategy is unlimited. In the above illustration there is a net inflow for the investor.


If for any case there is a net outflow, there would be one higher breakeven point. The point will be calculated as (Buy Put Strike price - net premium paid).



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