Short Put Ladder Strategy Explained

Nilesh Jain

01 Jun 2017

New Page 1

Short Put Ladder Strategy

A Short Put Ladder is the extension of Bull Put spread; the only difference is of an additional lower strike bought. The purpose of buying the additional strike is to get unlimited reward if the underlying asset goes down.

When to initiate a Short Put Ladder

A Short Put Ladder should be initiated when you are expecting big movement in the underlying asset, favoring downside movement. Profit potential will be unlimited when the stock breaks lower strike price. Also, another opportunity is when the implied volatility of the underlying asset falls unexpectedly and you expect volatility to go up then you can apply Short Put Ladder strategy.

How to construct Short Put Ladder?

A Short Put Ladder can be created by selling 1 ITM Put, buying 1 ATM Put and buying 1 OTM Put of the same underlying asset 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 - Sell 1 ATM Put, Buy 1 OTM Put and Buy 1 Far OTM Put.

Strategy Sell 1 ITM Put, Buy 1 ATM Put and Buy 1 OTM Put
Market Outlook Significant movement (lower side)
Upper Breakeven Strike price of Short Put - Net Premium Received
Lower Breakeven Addition of two Long Put strikes - Strike Price of Short Put + Net Premium Received
Risk Limited (expiry between upper and lower breakeven).
Reward Limited to premium received if stock surges above higher breakeven

Unlimited if stock falls below lower breakeven.

Margin required Yes

Let’s try to understand with an example:

Nifty Current spot price (Rs)

9400

Sell 1 ITM Put of strike price (Rs)

9500

Premium received (Rs)

180

Buy 1 ATM Put of strike price (Rs)

9400

Premium paid (Rs)

105

Buy 1 OTM Put of strike price (Rs)

9300

Premium paid (Rs)

45

Upper breakeven

9470

Lower breakeven

9230

Lot Size

75

Net Premium Received (Rs)

30

Suppose Nifty is trading at 9400. An investor Mr. A is expecting a significant movement in the Nifty with a slightly more bearish view, so he enters a Short Put Ladder by selling 9500 Put strike price at Rs 180, buying 9400 strike price at Rs 105 and buying 9300 Put for Rs 45. The net premium received to initiate this trade is Rs 30. Maximum loss from the above example would be Rs 5250 (70*75). It would only occur when the underlying asset expires in the range of strikes bought. Maximum profit would be unlimited if it breaks lower breakeven point. However, profit would be limited up to Rs 2250(30*75) if it moves 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 sold (9500) (Rs)

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

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

Net Payoff (Rs)

8700

-620

595

555

530

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 initiation of trade, Delta of the Short Put Ladder will be negative, indicating of a decent profit potential if the underlying asset moves lower.

Vega: Short Put Ladder has a positive Vega. Therefore, one should initiate Short Put Ladder spread when the volatility is low and expects it to rise.

Theta: A Short Put Ladder has negative Theta position and therefore it will lose value due to time decay as the expiration approaches.

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

How to manage Risk?

A Short Put Ladder is exposed to limited loss; hence it is advisable to carry overnight positions.

Analysis of Short Put Ladder Strategy:

A Short Put Ladder is best to use when you are confident that an underlying security will move significantly lower. Another scenario wherein this strategy can give profit is when there is a surge in implied volatility. It is a limited risk and an unlimited reward strategy only if movement comes on the lower side or else reward would also be limited.






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Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

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Short Put Ladder Strategy Explained

Nilesh Jain

01 Jun 2017

New Page 1

Short Put Ladder Strategy

A Short Put Ladder is the extension of Bull Put spread; the only difference is of an additional lower strike bought. The purpose of buying the additional strike is to get unlimited reward if the underlying asset goes down.

When to initiate a Short Put Ladder

A Short Put Ladder should be initiated when you are expecting big movement in the underlying asset, favoring downside movement. Profit potential will be unlimited when the stock breaks lower strike price. Also, another opportunity is when the implied volatility of the underlying asset falls unexpectedly and you expect volatility to go up then you can apply Short Put Ladder strategy.

How to construct Short Put Ladder?

A Short Put Ladder can be created by selling 1 ITM Put, buying 1 ATM Put and buying 1 OTM Put of the same underlying asset 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 - Sell 1 ATM Put, Buy 1 OTM Put and Buy 1 Far OTM Put.

Strategy Sell 1 ITM Put, Buy 1 ATM Put and Buy 1 OTM Put
Market Outlook Significant movement (lower side)
Upper Breakeven Strike price of Short Put - Net Premium Received
Lower Breakeven Addition of two Long Put strikes - Strike Price of Short Put + Net Premium Received
Risk Limited (expiry between upper and lower breakeven).
Reward Limited to premium received if stock surges above higher breakeven

Unlimited if stock falls below lower breakeven.

Margin required Yes

Let’s try to understand with an example:

Nifty Current spot price (Rs)

9400

Sell 1 ITM Put of strike price (Rs)

9500

Premium received (Rs)

180

Buy 1 ATM Put of strike price (Rs)

9400

Premium paid (Rs)

105

Buy 1 OTM Put of strike price (Rs)

9300

Premium paid (Rs)

45

Upper breakeven

9470

Lower breakeven

9230

Lot Size

75

Net Premium Received (Rs)

30

Suppose Nifty is trading at 9400. An investor Mr. A is expecting a significant movement in the Nifty with a slightly more bearish view, so he enters a Short Put Ladder by selling 9500 Put strike price at Rs 180, buying 9400 strike price at Rs 105 and buying 9300 Put for Rs 45. The net premium received to initiate this trade is Rs 30. Maximum loss from the above example would be Rs 5250 (70*75). It would only occur when the underlying asset expires in the range of strikes bought. Maximum profit would be unlimited if it breaks lower breakeven point. However, profit would be limited up to Rs 2250(30*75) if it moves 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 sold (9500) (Rs)

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

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

Net Payoff (Rs)

8700

-620

595

555

530

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 initiation of trade, Delta of the Short Put Ladder will be negative, indicating of a decent profit potential if the underlying asset moves lower.

Vega: Short Put Ladder has a positive Vega. Therefore, one should initiate Short Put Ladder spread when the volatility is low and expects it to rise.

Theta: A Short Put Ladder has negative Theta position and therefore it will lose value due to time decay as the expiration approaches.

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

How to manage Risk?

A Short Put Ladder is exposed to limited loss; hence it is advisable to carry overnight positions.

Analysis of Short Put Ladder Strategy:

A Short Put Ladder is best to use when you are confident that an underlying security will move significantly lower. Another scenario wherein this strategy can give profit is when there is a surge in implied volatility. It is a limited risk and an unlimited reward strategy only if movement comes on the lower side or else reward would also be limited.






Have Referral Code?