Bull Put Ladder is an extension to the Bull Put Spread. By buying another put
at a lower strike, the position assumes uncapped reward potential if the stock
problem is that now it is not totally clear if we have a bullish or bearish
strategy, but because we are net long puts and we have uncapped profit
potential if the stock falls, do we have to call this a bearish strategy? The
answer lies in the reason for the trade and the position of the stock relative
to the strikes.
we are net long options (and particularly out-of-the-money options), we are
better off trading this as a longer term strategy in order to counter the
effects of time decay.
in summary, if the stock falls below the lower (buy) strike, we make
potentially uncapped profit until the stock reaches zero; if the stock rises to
anywhere between the middle and upper (short) strikes, we make our maximum
loss. The extra leg also ensures that we may have two break even points.
this strategy for capital gain in a bearish environment.
is trading at $52 on May 10, 2011.
August 2011 40 strike put for $1.20.
August 2011 45 strike put for $2.40.
August 2011 50 strike put for $4.60.
strategy has unlimited profit potential with capped risk.
risk is limited to the difference between the lower and middle strikes minus
interim risk. The reward is uncapped.
strike minus maximum risk.
difference between the middle and higher strikes plus net debit.
even point up: Higher strike plus net debit or minus net credit.
even point down: Lower strike minus maximum risk.
Of Time Decay
when you are losing money, especially near the middle strike.
position is best closed out at least one month before expiration to either
contain losses or capture profit.
out the position by buying back the puts sold and selling the puts bought.