Article

Long Put Ladder Strategy Explained - Online Options Trading Guide

25 Sep 2017 Nilesh Jain

New Page 1

A Long Put Ladder is the extension of Bear Put spread; the only difference is of an additional lower strike sold. The purpose of selling the additional strike is to reduce the cost of premium. It is limited profit and unlimited risk strategy. It is implemented when the investor is expecting downside movement in the underlying assets till the lower strike sold. The motive behind initiating this strategy is to rightly predict the stock price till expiration and gain from time value.

When to initiate a Long Put Ladder

A Long Put Ladder should be initiated when you are moderately bearish on the underlying asset and if it expires in the range of strike price sold then you can earn from time value and delta factor. Also, another instance is when the implied volatility of the underlying asset increases unexpectedly and you expect volatility to come down then you can apply Long Put Ladder strategy.

How to construct Long Put Ladder

A Long Put Ladder can be created by buying 1 ITM Put, selling 1 ATM Put and selling 1 OTM Put of the same underlying security with the same expiry. Strike price can be customized as per the convenience of the trader. A trader can also initiate the Short Put Ladder strategy in the following way - buy 1 ATM Put, Sell 1O TM Put and Sell 1 Far OTM Put.

Strategy

Buy 1 ITM Put, Sell 1 ATM Put and Sell 1 OTM Put

Market Outlook

Moderately bearish

Upper Breakeven

Strike price of long Put - Net Premium Paid

Lower Breakeven

Addition of two sold Put strikes - Strike price of long Put + Net premium paid

Risk

Limited to premium paid if stock goes above higher breakeven.

Unlimited if stock falls below lower breakeven.

Reward

Limited (expiry between upper and lower breakeven)

Margin required

Yes

Let’s try to understand with an example:

Nifty Current spot price (Rs)

9400

Buy 1 ITM Put of strike price (Rs)

9500

Premium paid (Rs)

180

Sell 1 ATM Put of strike price (Rs)

9400

Premium received (Rs)

105

Sell 1 OTM Put of strike price (Rs)

9300

Premium received (Rs)

45

Upper breakeven

9470

Lower breakeven

9230

Lot Size

75

Net Premium Paid (Rs)

30

Suppose Nifty is trading at 9400. An investor Mr. A feels that Nifty will expire in the range of 9400 and 9300 strikes, so he enters a Long Put Ladder by buying 9500 Put strike price at Rs 180, selling 9400 strike price at Rs 105 and selling 9300 Put for Rs 45. The net premium paid to initiate this trade is Rs 30. Maximum profit from the above example would be Rs 5250 (70*75). It would only occur when the underlying assets expires in the range of strikes sold. Maximum loss would be unlimited if it breaks lower breakeven point. However, loss would be limited up to Rs 2250 (30*75) if Nifty surges above the higher breakeven point.

For the ease of understanding, we did not take in to account commission charges. Following is the payoff chart and payoff schedule assuming different scenarios of expiry.

The Payoff chart:

The Payoff Schedule:

On Expiry NIFTY closes at

Payoff from 1 ITM Put Bought (9500) (Rs)

Payoff from 1 ATM Puts Sold (9400) (Rs)

Payoff from 1 OTM Put Sold (9300) (Rs)

Net Payoff (Rs)

8800

520

-495

-455

-430

8900

420

-395

-355

-330

9000

320

-295

-255

-230

9100

220

-195

-155

-130

9200

120

-95

-55

-30

9230

90

-65

-25

0

9300

20

5

45

70

9400

-80

105

45

70

9470

-150

105

45

0

9500

-180

105

45

-30

9600

-180

105

45

-30

9700

-180

105

45

-30

9800

-180

105

45

-30

Impact of Options Greeks:

Delta: At the time of initiating this strategy, we will have a short Delta position, which indicates any significant downside movement, will lead to unlimited loss.

Vega: Long Put Ladder has a negative Vega. Therefore, one should buy Long Put Ladder spread when the volatility is high and expects it to decline.

Theta: A Long Put Ladder will benefit from Theta if it moves steadily and expires in the range of strikes sold.

Gamma: This strategy will have a short Gamma position, which indicates any significant downside movement, will lead to unlimited loss.

How to manage Risk?

A Long Put Ladder is exposed to unlimited risk; hence it is advisable not to carry overnight positions. Also, one should always strictly adhere to Stop Loss in order to restrict losses.

Analysis of Long Put Ladder Strategy:

A Long Put Ladder spread is best to use when you are confident that an underlying security will move marginally lower and will stay in a range of strike price sold. Another scenario wherein this strategy can give profit is when there is a decrease in implied volatility.

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Beginner's Corner

Long Put Ladder Strategy Explained - Online Options Trading Guide

25 Sep 2017 Nilesh Jain

New Page 1

A Long Put Ladder is the extension of Bear Put spread; the only difference is of an additional lower strike sold. The purpose of selling the additional strike is to reduce the cost of premium. It is limited profit and unlimited risk strategy. It is implemented when the investor is expecting downside movement in the underlying assets till the lower strike sold. The motive behind initiating this strategy is to rightly predict the stock price till expiration and gain from time value.

When to initiate a Long Put Ladder

A Long Put Ladder should be initiated when you are moderately bearish on the underlying asset and if it expires in the range of strike price sold then you can earn from time value and delta factor. Also, another instance is when the implied volatility of the underlying asset increases unexpectedly and you expect volatility to come down then you can apply Long Put Ladder strategy.

How to construct Long Put Ladder

A Long Put Ladder can be created by buying 1 ITM Put, selling 1 ATM Put and selling 1 OTM Put of the same underlying security with the same expiry. Strike price can be customized as per the convenience of the trader. A trader can also initiate the Short Put Ladder strategy in the following way - buy 1 ATM Put, Sell 1O TM Put and Sell 1 Far OTM Put.

Strategy

Buy 1 ITM Put, Sell 1 ATM Put and Sell 1 OTM Put

Market Outlook

Moderately bearish

Upper Breakeven

Strike price of long Put - Net Premium Paid

Lower Breakeven

Addition of two sold Put strikes - Strike price of long Put + Net premium paid

Risk

Limited to premium paid if stock goes above higher breakeven.

Unlimited if stock falls below lower breakeven.

Reward

Limited (expiry between upper and lower breakeven)

Margin required

Yes

Let’s try to understand with an example:

Nifty Current spot price (Rs)

9400

Buy 1 ITM Put of strike price (Rs)

9500

Premium paid (Rs)

180

Sell 1 ATM Put of strike price (Rs)

9400

Premium received (Rs)

105

Sell 1 OTM Put of strike price (Rs)

9300

Premium received (Rs)

45

Upper breakeven

9470

Lower breakeven

9230

Lot Size

75

Net Premium Paid (Rs)

30

Suppose Nifty is trading at 9400. An investor Mr. A feels that Nifty will expire in the range of 9400 and 9300 strikes, so he enters a Long Put Ladder by buying 9500 Put strike price at Rs 180, selling 9400 strike price at Rs 105 and selling 9300 Put for Rs 45. The net premium paid to initiate this trade is Rs 30. Maximum profit from the above example would be Rs 5250 (70*75). It would only occur when the underlying assets expires in the range of strikes sold. Maximum loss would be unlimited if it breaks lower breakeven point. However, loss would be limited up to Rs 2250 (30*75) if Nifty surges above the higher breakeven point.

For the ease of understanding, we did not take in to account commission charges. Following is the payoff chart and payoff schedule assuming different scenarios of expiry.

The Payoff chart:

The Payoff Schedule:

On Expiry NIFTY closes at

Payoff from 1 ITM Put Bought (9500) (Rs)

Payoff from 1 ATM Puts Sold (9400) (Rs)

Payoff from 1 OTM Put Sold (9300) (Rs)

Net Payoff (Rs)

8800

520

-495

-455

-430

8900

420

-395

-355

-330

9000

320

-295

-255

-230

9100

220

-195

-155

-130

9200

120

-95

-55

-30

9230

90

-65

-25

0

9300

20

5

45

70

9400

-80

105

45

70

9470

-150

105

45

0

9500

-180

105

45

-30

9600

-180

105

45

-30

9700

-180

105

45

-30

9800

-180

105

45

-30

Impact of Options Greeks:

Delta: At the time of initiating this strategy, we will have a short Delta position, which indicates any significant downside movement, will lead to unlimited loss.

Vega: Long Put Ladder has a negative Vega. Therefore, one should buy Long Put Ladder spread when the volatility is high and expects it to decline.

Theta: A Long Put Ladder will benefit from Theta if it moves steadily and expires in the range of strikes sold.

Gamma: This strategy will have a short Gamma position, which indicates any significant downside movement, will lead to unlimited loss.

How to manage Risk?

A Long Put Ladder is exposed to unlimited risk; hence it is advisable not to carry overnight positions. Also, one should always strictly adhere to Stop Loss in order to restrict losses.

Analysis of Long Put Ladder Strategy:

A Long Put Ladder spread is best to use when you are confident that an underlying security will move marginally lower and will stay in a range of strike price sold. Another scenario wherein this strategy can give profit is when there is a decrease in implied volatility.