Bull Put Ladder
The Bull Put Ladder is an options trading strategy that is used to increase the profit potential of a basic bull put spread when a trader expects a moderate rise in the price of the underlying asset but also wants to increase profit potential if the price of the asset rises sharply. This strategy is selling a put option at a higher strike, buying a put at a lower strike, and then selling another put at an even lower strike, all in the same expiration period.
The Bull Put Ladder Setup
Suppose you’re watching stock ABC, which is trading at $100. You could set up a Bull Put Ladder by:
- Selling one put option with a strike price of $100 for $6.
- Buying one put option with a strike price of $95 for $4.
- Selling another put option with a strike price of $90 for $2.
This setup results in an initial net credit (premium received from the sold puts is greater than the premium paid for the bought put).
Who Should Consider It
This strategy is apt for traders who are moderately bullish on a stock but also believe that there could be a chance of a massive upward movement. It enables a trader to reap the benefits from an increase in the stock price while providing some protection on the downside.
Strategy Explained
During this Bull Put Ladder, when the stock remains above the top strike at the expiration date, the trader profited. More sold put to increase the likely return is involved, but significant declines in a stock price send the risk all the way through the roof in unlimited fashion.
The breakeven point for a Bull Put Ladder is not easily determined because it depends on the net premium and the strikes chosen. In general, the breakeven is calculated by subtracting the net credit from the lowest put strike price.
Sweet Spot
The best payoff for this strategy happens when the stock price is above the strike price of highest value (our example being $100 strike price) at expiry. In such a scenario, the premium amounts are maximised and the potential losses due to the in-the-money puts do not happen.
Max Profit Potential
The maximum profit is capped at the net credit received when establishing the spread. This happens when the stock price remains above the highest put strike price at expiration.
Max Loss
Theoretically, the maximum risk is unlimited below the lowest strike price because of the additional sold put, which increases the obligation to buy the stock at a lower price if it declines considerably.
Risk
The largest risk with a Bull Put Ladder is from the stock price going below the lowest put strike. If it falls dramatically, there is enormous potential loss on the trade.
Time Decay
Time decay, or Theta, tends to work in this trader’s favor since it involves selling more options net. Because of this, as expiration looms closer, the value of the short typically tends to be less, and that is to their advantage unless the stock price changes dramatically.
Implied Volatility
This strategy can be negatively affected by changes in implied volatility. An increase in volatility increases the risk because it increases the value of the options, especially on the additional short put, thereby increasing potential losses.
Conclusion
The Bull Put Ladder strategy is complex in nature and not recommended for newbie traders. Only experienced traders seeking to add increased premium income returns to a bull put spread need to be exposed to the full risks associated with this strategy while being aware that it has its attractive profit potentials if the stock rises or maintains its stability at any given moment.