Bear Put Ladder

Bear Put Ladder

Post By - Laxmi Mahera
Review By : Rohan Sharma
Updated on : October 26, 2021

Basics Concepts – Bear Put Ladder

Description - Bear Put Ladder

The Bear Put Ladder is an extension to the Bear Put Spread.
By shorting another put at a lower strike price, the position assumes uncapped risk potential if the stock plummets downwards.
if the stock rises above the higher (buy) strike, you can make a loss;
if the stock falls to anywhere between the middle and lower (short) strikes, you make your maximum profit;
if the stock falls below the lowest strike, then you can make unlimited losses. The extra leg also ensures that you may have two breakeven points.
Sell lower strike puts
Sell the same number of middle strike puts with the same expiration date.
Buy the same number of higher strike puts with the same expiration date.

Introduction to Bear Put Ladder

Outlook

A Bear Put Ladder is a Bear Put Spread financed by selling an additional put further OTM.

Rationale

To execute a direction neutral/conservatively bearish trade for enhanced income. The lower strike sold puts will have the effect of uncapping your potential risk.

Net Position

This can be a net debit or net credit trade because while your bought puts will be more expensive than your sold puts, you’re selling more puts that you’re buying. Most of the time this is likely to be a net debit trade.
Your maximum risk on the trade is uncapped to the downside because you are selling more puts than you’re
buying.

Effect of Time Decay

Time decay is generally helpful when the position is profitable, particularly around the middle strike.

Time Period to Trade

You will be safest to choose a shorter term to expiration in order to avoid the possibility of an uncapped loss scenario if the underlying asset falls too much.

Breakeven Down = [Lower strike – maximum reward]

Breakeven Up = [Higher strike + net debit]

Steps to Trading a Bear Put Ladder

Steps In

Try to ensure that the trend is downward but identify a clear area of support and resistance.

Steps Out

Manage your position according to the rules defined in your Trading Plan.
If the stock rises above your stop loss, then sell the Long Put, and if you’re not permitted to trade Naked Puts, then unravel the entire position.

Exiting the trade - Bear Put Ladder

Exiting the Position

With this strategy, you can simply unravel the spread by buying back the puts you sold and selling the puts you bought in the first place.
Advanced traders may leg up and down as the underlying asset fluctuates up and down. In this way, the trader will be taking smaller incremental profits before the expiration of the trade.

Mitigating a Loss

Unravel the trade as described previously.
Advanced traders may choose to only partially unravel the spread leg-by-leg.

Advantages and Disadvantages

Advantages

Lower cost and better breakeven scenario than a Bear Put Spread.
The farther away from expiration you are, the more downside protection you have in the event of the stock declining rapidly.

Disadvantages

Confusing as to whether this is a bullish or bearish strategy.
Capped upside if the stock rises.
Uncapped downside if the stock falls.
Typically used as a repair to a Bear Put Spread; therefore, this is only for more advanced traders.

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