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.