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Long Put Ladder-Neutral Strategy

Options-Trading-Beginners

Explanation

This strategy is implemented when a trader is slightly bearish on the market as well as on volatility. Long Put Ladder options strategy is a bearish strategy which is made for net debit investment. The purpose of selling the additional strike is to reduce the cost of premium.

Risk:

Losses are limited to the initial debit taken if the stock price rallies above the upper breakeven point, but substantial losses can be occurred if the underlying asset price moves below the lower breakeven point.

Reward

Maximum reward for this options strategy is limited and occurs when the underlying stock price is trading between the strike prices of the put options sold. Max profit is achieved when price of underlying is in between the strike prices of the 2 short puts.

Construction

Buy 1 ITM Put Option

Sell1 ATM Put Option

Sell1OTM Put Option

Option Type Expiry Date Strike Price LTP Action No. Of Lots
PUT 27/04/2023 43000.0 315.8 Buy 1
PUT 27/04/2023 42400.0 63.95 Sell 1
PUT 27/04/2023 42700.0 149.4 Sell 1

 

Max Risk Max Reward Lower Break Even Upper Break Even
Unlimited -402.45 42202.45 42897.55

 

Market Expiry Payoff 1 Payoff 2 Payoff 3 Net Premium Option Payoff At Expiry
41900.0 1100.0 -500.0 -800.0 -102.45 -302.45
42000.0 1000.0 -400.0 -700.0 -102.45 -202.45
42100.0 900.0 -300.0 -600.0 -102.45 -102.45
42200.0 800.0 -200.0 -500.0 -102.45 -2.45
42300.0 700.0 -100.0 -400.0 -102.45 97.55
42400.0 600.0 0.0 -300.0 -102.45 197.55
42500.0 500.0 0.0 -200.0 -102.45 197.55
42600.0 400.0 0.0 -100.0 -102.45 197.55
42700.0 300.0 0.0 0.0 -102.45 197.55
42800.0 200.0 0.0 0.0 -102.45 97.55
42900.0 100.0 0.0 0.0 -102.45 -2.45
43000.0 0.0 0.0 0.0 -102.45 -102.45
43100.0 0.0 0.0 0.0 -102.45 -102.45
43200.0 0.0 0.0 0.0 -102.45 -102.45
43300.0 0.0 0.0 0.0 -102.45 -102.45
43400.0 0.0 0.0 0.0 -102.45 -102.45
43500.0 0.0 0.0 0.0 -102.45 -102.45

 

 Payoff Chart

 

Example

Bank nifty is currently trading at 42700 levels and the trader is sightly bearish on the market and expects the volatility to stay low till the expiry. He implemented the long put ladder strategy, where he bought 1 ITM option by paying the premium of Rs. 315, sold 1 ATM put option at the premium of Rs. 150 and shorted another OTM put option with strike of 42400 at premium of Rs 64. His total initial out flow stands at Rs. 5050 ((315-64-150) *50.

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    Scenario 1:

    if due to any news, Bank nifty tops above the long put option. In that scenario all the position will become OTM and trader stand to loos the initial premium paid, which is Rs. 5050.

    Scenario 2:

     if the bank nifty didn’t show sudden spike/fall till the expiry, the trader will book gain on long put option and will keep the new premium that was received from shorting the put options.

    Scenario3:

    if the market takes a downward trend due to announcement RBI policy rate hike, in that situation as the bank nifty starts to touch new lows. The losses will only expand.

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