Options Trading Strategies: Short Put Ladder
The short put ladder (otherwise called a bull put ladder) is a three-legged strategy, created by buying one Out of The Money put, buying one At The Money put, and selling one In The Money put, all with the same expiration date.
When to use this strategy?
You are bearish and looking for a capital gain low risk strategy. Also, because this strategy is an extension of the bull put spread which is a bullish strategy, by buying an additional ATM put you can repair the strategy to make it more bearish if the market doesn’t go in the planned direction.
Below is a Profit and Loss chart example of the short put ladder options strategy:
Pros:
Uncapped maximum profit and capped maximum risk.
Cons:
Same as the short call ladder, depending on the option prices of the selected strikes and a selected expiration date, you can end up with a net debit trade.
Example:
In this example, BTC is trading at 37,063.11 USD. You have bought an OTM put with a strike price of35,000.00 USD, bought an ATM put with a strike price of 37,000.00 USD, and sold an ITM put with a strike price of 39,000.00 USD, all with an expiration date of February 11th 2022. As this is a net credit trade you have received a net premium of 566.70 USD.
The Profit and Loss chart is given below:
Upon expiration:
If the BTC price is below the OTM long puts strike price, all puts will be assigned, this can lead you to potentially unlimited profit, and you are in the profit as long as the bitcoin price is below the first break-even price.
If the BTC price ends up at or between the OTM long put and ATM long put strike prices, only the ITM short put will be assigned. In this situation, you are at your maximum loss which is equal to the difference between the ITM short put and ATM long put strikes minus the net premium received.
If the BTC price is above the ATM long put strike, but below the ITM short put strike price, you will be in the profit as long as the bitcoin price is above the second break-even price.
If the BTC price is at or above the ITM short put, all puts will expire worthless, and your profit will be the net premium received.
| BTC at Expiry (USD) | Payoff (USD) |
|---|---|
| 31,836.00 | +1,730.70 |
| 32,896.00 | +670.70 |
| 33,566.70 (break even 1) | 0 |
| 34,209.00 | -642.30 |
| 35,000.00 & 37,000.00 (LP OTM & LP ATM) | -1,433.30 (max loss is between strikes) |
| 37,705.00 | -728.30 |
| 38,433.30 (break even 2) | 0 |
| 38,716.00 | +282.70 |
| 39,000.00 (SP ITM) | +566.70 |