A Short Put Ladder strategy is an extension to a Put Spread by buying an additional put option.
There are three different striking prices involved in this strategy.
An investor sells a put option of a higher strike price, purchases a put option at the middle strike price and purchases another put option of a lower strike price, all of the same underlying security and same expiry.
When to use this strategy?
This strategy is used when the investor expects high volatility in the short term, with a bearish bias.
How to build this strategy?
This strategy has three legs:
Leg 1 – Sell 1 ITM Put
Leg 2 – Buy 1 ATM Put
Leg 3 – Buy 1 OTM Put
Credit Spread/Debit Spread
This is a Credit Spread strategy.
This strategy has unlimited profit potential.
When is this strategy profitable?
The investor earns limited profit if the underlying price goes up.
But the investor’s profit is unlimited if the price of the underlying security falls sharply below the strike price of the put options purchased.
The investor faces limited risk in this strategy.
When is this strategy unprofitable?
The investor faces a loss when the price of the underlying security at expiry is between the strike prices of the two put options purchased.