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Short Put Ladder - An Option Trading Strategy

In today's article, we shall learn about the short-put ladder strategy. The short-put ladder strategy belongs to the family of ladder strategy. Some traders also call it a Bear put ladder strategy. The market outlook of the strategy ranges from neutral to bearish. The ladder strategy consists of having three contracts. The short put ladder strategy is the extended version of the bull put spread, having bought one additional lower strike

contract.


When to use a short put ladder?

  • The strategy is profitable when the price of the underlying asset falls significantly

  • When you expect a downfall in the underlying stock's price, use this strategy.

  • When the stock breaks the lowest strike price, traders will experience unlimited profit.

How to enter the short-put ladder strategy?

To enter the short put ladder strategy, traders have to sell one In-the-money put contract, buy one at-the-money put, and buy one out-of-the-money put contract, all having the same underlying asset and the expiry. Traders may choose different strike prices according to their convenience.

  • Sell 1 ITM put option contract.

  • Buy 1 ATM put option contract.

  • Buy 1 OTM put option contract.


What are the breakeven points of the short-put ladder strategy?

This strategy has two breakeven points as follows:

  • Upper breakeven point = Short put Strike price - Net premium received

  • Lower breakeven point = Total of two long put strike prices - strike price of short put + net premium received.


Illustration

Eg. Nifty is currently trading @ 5500. Selling Put Option of Nifty having Strike 5600 @ premium 140, buying Put Option of Nifty having Strike 5400 @ premium 60 and Put Option of Nifty having Strike 5500 @ premium 100 will help investor benefit if Nifty expiry happens below 5300.

Strategy

Stock/Index

Type

Strike

Premium Inflow

Short Put Ladder

NIFTY (Lot size 50)

Buy Put

5400

60 (Outflow)

Buy Put

5500

100 (Outflow)

Sell Put

5600

140 (Inflow)


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


Short Put Ladder - An Option Trading Strategy

In the above chart, the breakeven happens the moment Nifty crosses 5280 (since net outflow is ₹20). The reward in such a strategy is unlimited. The risk is limited to 6000 [calculated as (Difference in strike prices + net premium paid) * Lot Size].


In the above illustration there is a net outflow for the investor. If for any other case there is a net inflow, there would be one higher breakeven point. The point will be calculated as (Sell Put Strike price + net premium received)

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