Investment Type: Debit
Strike Prices: ITM for bought leg, OTM for 1st sold leg, further OTM for 2nd sold leg
Expiration Month: Same expiration month for all legs, it can be current month or longer term
Composition: Buy higher strike Put + Sell middle strike Put + Sell lower strike Put
| Bear Put Ladder Profile Chart | ||
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Bear Put Ladder is the extension of Bear Put Spread. When we perform Bear Put Spread, our intention is to reduce our initial cost of our Buy Put, with an OTM Sell Put. However with Bear Put Ladder, we add another Sell Put and the strike price is further OTM. Therefore further reduce the initial cost.
This results in better breakeven point with added unlimited risk if the stock price falls too much. Ideally, we want the stock price to be between sold leg and middle-strike bought leg.
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Entry:
Investment @ Entry = (Premium of lower strike Leg x No of Contracts x 100 Shares) + (Premium of medium strike Leg x No of Contracts x 100 Shares) + (Premium of higher strike Leg x No of Contracts x 100 Shares) = $8,500 + ($3,000) + ($1,000) = $4,500
Breakeven Point Down = bought leg (lower strike) + Net Debit = $30.00 – ($35.00 - $32.50 - $0.90) = $28.40
Exit:
Best Case Scenario:
Profit @ Exit = (Premium of lower strike Leg x No of Contracts x 100 Shares) + (Premium of medium strike Leg x No of Contracts x 100 Shares) + (Premium of higher strike Leg x No of Contracts x 100 Shares) – Investment @ Entry = $25,000 + ($12,500) + $0 - $4,500 = $8,000
Return of Investment = Profit @ Exit / Investment @ Entry = 178%
Worst Case Scenario : Unlimited Loss
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