Bull Put Ladder Strategy

Purab Kumar -

The Bull Put Ladder strategy is an advanced options trading strategy that allows traders to profit from very bullish or very bearish market conditions while simultaneously limiting their downside risk. This strategy involves selling & buying multiple put options at different strike prices and expiration dates. In this blog post, we will explain the Bull Put Ladder strategy in detail, provide examples, and discuss the pros and cons of using this strategy.

What is the Bull Put Ladder strategy?

A bull put ladder is an extension to the bull put spread, as it now includes another long put. The name suggests it is a bullish strategy, but it is actually very bearish or bullish since it has a nearly infinite gain on the downside and a capped gain on the upside.

In a Bull Put Spread, a trader sells a put option with a higher strike price and buys a put option with a lower strike price. The trader receives a credit for the difference in premiums between the two options. This strategy is profitable if the underlying asset price remains above the strike price of the sold put option.

In a Long Put, a trader buys a single put option at a specific strike price and expiration date. The trader pays the premium to the seller of the option. This strategy is profitable if the underlying asset price falls below the strike price of the put option bought.

The Bull Put Ladder strategy combines these two strategies by selling multiple put options & buying a single put option at different strike prices and expiration dates. The strategy involves buying a higher number of put options with higher strike prices and selling a lower number of put options with lower strike prices. This results in a net premium paid by the trader for the entire ladder of options, with nearly infinite gain on the downside and a capped gain on the upside.

This Strategy involves writing an ATM or slightly OTM Put option having a higher strike price, buying the same number of OTM Put option having middle strike price, and again buying the same number of OTM Put option but having a lower strike price

Max Profit and Max loss in Bull Put Ladder Strategy

In the Bull Put Ladder strategy, the maximum profit and maximum loss can be calculated as follows:

Maximum Profit: Since this strategy involves buying 2 puts as opposed to selling just one put, the trader is essentially net long, which enables the trader to earn an unlimited profit once the underlying price fell below a certain price level.

Maximum Loss: The maximum loss for the Bull Put Ladder strategy is the premium paid by the trader and occurs when the underlying price is between the middle and the lower strike price.

Payoff matrix of this strategy:

Pros and Cons of Using the Bull Put Ladder Strategy in India

Pros:

  1. Potential of unlimited profits if the underlying falls below the lower breakeven point
  2. Potential to retain the entire premium if the underlying price stays above the higher strike price.
  3. This strategy is subjected to limited risk.

Cons:

  1. If the underlying price gets stuck between the 2 breakeven points, the trader will suffer a loss.
  2. As this strategy involves selling and buying multiple options, it requires careful monitoring of the market conditions to ensure that the underlying asset price remains above the highest or falls below the lowest strike price of the ladder
  3. Sometimes this strategy could be a net debit strategy.

Strategy Suggestions

  1. The ratio of puts bought and sold must be maintained. For instance, if you sell 1 Put then you can buy only 1 Put each of two different strike prices.
  2. When choosing the two strikes for buying the Puts, do not just randomly select any strike. Remember, if the underlying price declines, you would want it to fall below the lowest breakeven point. Hence, choose the long Put strike accordingly.
  3. The difference between the higher strike and the two lower strikes will be a trade-off between the net premium received and risk.
  4. The larger the difference between the higher strike and the two lower strikes, the larger would be the net premium received but so would the risk, and vice versa.
  5. Because, this strategy involves buying two Put and attains its Maximum profit potential once the underlying declines below the lower breakeven point, see that there is sufficient time left in the life of the option contract for this strategy to work in your favour.
  6. Ensure that there is sufficient liquidity in the underlying that is being chosen to initiate this strategy.

Conclusion:

The Bull Put Ladder strategy can be an effective way to generate income while limiting downside risk in a bullish market. However, it requires careful monitoring and adjustment to suit individual risk tolerance and market conditions. Traders should also be aware of the potential risks involved, such as the limited profit potential and the possibility of early assignment. As with any trading strategy, it is important to do your research and understand the risks before implementing the Bull Put Ladder strategy in the Indian market.

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