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Short Put Ladder-Neutral Strategy

Options-Trading-Beginners

Explanation

A Short Put Ladder is a bearish option strategy when trader is bullish on volatility. This strategy is executed for net credit and is the extension of Bull Put spread. The only difference between Short Put Ladder and Bull Put spreadis theadditional lower strike bought.The purpose of buying the additional out-of-the-money (OTM) strike is to get unlimited reward if the underlying securityfalls as per trader’s expectation.

For implementing this strategy required sale of an in the money (ITM) Put Option and buying of 1 at-the-money (ATM)& 1 out-of-the-money (OTM) Put Options.

Risk

Risk associated with this strategy is limited. Loss potential for this strategy is limited and occurs when price of the underlying at expirytrades between strike prices of the put options bought. The short put and the middle put will trade ITM and further OTM put will expire worthless.

Reward

Maximum gain can occur in two scenarios

  1. If the underlying price rises beyond the short put, at that moment the strategy implementer will get to keep the net premium received.
  2. Another scenario could be, if the underlying price fall below the long OTM put. In that situation both long put will become ITM, one put option profit will compensate for short put and other will result in straight profits.

 

Construction

Sell 1 ITM Put Option

Buy 1 ATM Put Option

Buy 1OTMPutOption

 

Option Type Expiry Date Strike Price LTP Action No. Of Lots
PUT 27/04/2023 42300.0 64.1 Buy 1
PUT 27/04/2023 43100.0 422.05 Sell 1
PUT 27/04/2023 42700.0 185.6 Buy 1

 

Max Risk Max Reward Lower Break Even Upper Break Even
Unlimited -227.65002 -42072.35 -42072.35

 

Market Expiry Payoff 1 Payoff 2 Payoff 3 Net Premium Option PayOff At Expiry
41900.0 400.0 -1200.0 800.0 172.35 172.35
42000.0 300.0 -1100.0 700.0 172.35 72.35
42100.0 200.0 -1000.0 600.0 172.35 -27.65
42200.0 100.0 -900.0 500.0 172.35 -127.65
42300.0 0.0 -800.0 400.0 172.35 -227.65
42400.0 0.0 -700.0 300.0 172.35 -227.65
42500.0 0.0 -600.0 200.0 172.35 -227.65
42600.0 0.0 -500.0 100.0 172.35 -227.65
42700.0 0.0 -400.0 0.0 172.35 -227.65
42800.0 0.0 -300.0 0.0 172.35 -127.65
42900.0 0.0 -200.0 0.0 172.35 -27.65
43000.0 0.0 -100.0 0.0 172.35 72.35
43100.0 0.0 0.0 0.0 172.35 172.35
43200.0 0.0 0.0 0.0 172.35 172.35
43300.0 0.0 0.0 0.0 172.35 172.35
43400.0 0.0 0.0 0.0 172.35 172.35
43500.0 0.0 0.0 0.0 172.35 172.35

 

Payoff Chart

 

Example

The Federal reserve has done fastest rate hikes of the decade and you see RBI to follow path. The bank nifty is trading at 42700 levels and you are bearish on the Bank nifty index but the fundamental counter your assumptions. You decided to implement short put ladder where you where you sold 1 43100 ITM put at a premium of Rs. 422, bough 1 42700 OTM put by paying a premium of Rs. 186 and bought another deep OTM put option at strike price of 42300 at the premium of Rs. 64. Total credit he received by implementing this strategy is Rs. 4325 (422 – 186 - 64) * 25.

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    Scenario1:

    If at expiry instead of falling, the market rose. The trader will keep the net premium received, which is Rs. 4325.

    Scenario 2:

     If the market showed somewhat volatility on the downside and closed near the middle long put at 42700 levels. At that point the trader will make losses on short put and the both long put option will expire worthless. The loss will be equal to Rs. 5675 as shown in table below.

    Scenario 3:

    If the trader bearish view holds true and market closes below the 42300 levels. At the at time all the strike will become ITM.The trader will gain from long puts as the market inches lower as shown in payoff chart above.

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