The bear put spread is expanded by a bear put ladder, which now contains a second short put. Although the strategy’s name might lead one to believe otherwise given its practically limitless downside loss, it is actually neutral to slightly bearish.
Alias
Long Put Ladder
Description
Involves selling put options at three different strike prices. The trader sells a put option with a low strike price and also sells a put option with a higher strike price while buying a put option with an even higher strike price (this is known as a “put spread”). The trader is betting that the underlying stock price will decline and profits from the strategy if the stock price goes down.
The bear put ladder is a limited risk, limited reward strategy, because the potential profit is limited to the difference between the strike prices of the short put options, plus the initial premium received for selling the options. If the stock price doesn’t decline as expected, the trader may be assigned and required to sell the stock at the lower strike price of the short put options. However, if the stock price declines, the trader can profit by buying back the short put options at a higher price, or by allowing them to expire worthless. It can be an effective way to profit from a bearish market with limited capital, but it’s important to understand the risks and limitations of this strategy.
When the position is profitable, time is beneficial; when it is not, time is detrimental. Reduced volatility helps and improves the likelihood of remaining in the profitable zone.
Breakeven
Leg 1 minus the net debit
Leg 3 minus the net debit
Sweetspot
The stock price at Leg 2
Max profit
limited to the difference between the strike prices of the two short put options, plus the premium received for selling the options.
Max loss
limited to the difference between the strike prices of the two long put options, minus the premium received for selling the options.
