Tim Olson
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1.5 KiB
1.5 KiB
description, tags
| description | tags | ||||
|---|---|---|---|---|---|
| A bearish-adjusted strategy selling a near-ATM put at K1 and buying two lower OTM puts at K2 and K3, arising when a bull put spread is adjusted for a stock that trades lower. |
|
Bull Put Ladder
Section: 2.15 | Asset Class: Options | Type: Hedging
Overview
The bull put ladder is a vertical spread consisting of a short put at K1 (near ATM), a long put at K2 (OTM), and a long put at K3 (further OTM, K3 < K2 < K1). A bull put ladder typically arises when a bull put spread goes wrong (the stock trades lower), so the trader buys another OTM put at K3 to adjust the position to bearish.
Construction
- Sell 1 put option at strike K1 (near ATM)
- Buy 1 put option at strike K2 (OTM, K2 < K1)
- Buy 1 put option at strike K3 (further OTM, K3 < K2), same expiry
Net debit or credit H
Payoff Profile
f_T = (K3 - S_T)+ + (K2 - S_T)+ - (K1 - S_T)+ - H
- Upper breakeven: S*_up = K1 + H (if H < 0, net credit)
- Lower breakeven: S*_down = K3 + K2 - K1 - H
- Max profit: P_max = K3 + K2 - K1 - H (if S_T -> 0)
- Max loss: L_max = K1 - K2 + H (in zone [K2, K1])
Key Conditions / Signals
- Bearish adjustment to a bull put spread that has moved against the trader
- Profits if the stock continues to fall significantly below K3
- Low volatility near K1 environment after adjustment is undesirable
Notes
The bull put ladder converts a bullish income strategy into a bearish capital gain strategy. The additional long put at K3 limits the maximum loss zone and creates profit on a sharp decline.