The bull put spread is expanded by a bull put ladder, which now contains a second long put. Although the strategy’s name suggests it is bullish, it is actually very bearish or bullish because its upward gain is capped and its downside gain is practically infinite.
Alias
Short Put Ladder
Description
Involves selling put options at three different strike prices. The trader sells a put option with a high strike price and also sells a put option with a lower strike price, while buying a put option with an even lower strike price (this is known as a “put spread”). The trader is betting that the underlying stock price will rise, and profits from the strategy if the stock price goes up.
The bull 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, minus the initial premium received for selling the options. If the stock price doesn’t rise as expected, the trader may be assigned and required to buy the stock at the higher strike price of the short put options. However, if the stock price rises, the trader can profit by buying back the short put options at a lower price, or by allowing them to expire worthless. It can be an effective way to profit from a bullish market with limited capital, but it’s important to understand the risks and limitations of this strategy.
For this method to be successful, there must be a lot of volatility. Time is detrimental when a position is unprofitable but advantageous when it is profitable.
Breakeven
Leg 1 minus the net credit received
Leg 3 minus the net credit received
Sweetspot
Stock price goes way lower
Max profit
limited to the difference between the strike prices of the two short put options, minus the premium received for selling the options.
Max loss
is limited to the difference between the strike prices of the two long put options, plus the premium received for selling the options
