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 plummets.
The problem is that now its 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 OTM options), we are better off
trading this as a longer-term strategy in order to counter the effects of time
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 when your outlook is conservatively bearish and you want income.
is trading at $26.10 on May 10, 2011.
June 2011 $22.50 strike call for $0.30.
June 2011 25 strike call for $1.00.
June 2011 $27.50 strike call for $2.40.
cost for this strategy would be lower than doing a bear put spread. And the
farther away from expiration, the more protection on the downside.
risk is unlimited on the downside as you are selling more puts than buying. The
reward is the difference between the middle and higher strike prices minus your
net debit or net credit.
is limited profit potential
strike minus (higher strike minus middle strike) plus net debit.
break even point: total strike prices of short puts minus strike price of long
put plus premium paid.
break even point: Strike price of long put minus premium paid.
to low effect.
Of Time Decay
when your position is profitable.
can sell the long put if your stock rises above stop loss, or close out the
position by buying back puts sold and selling puts bought.