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 |
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)