Investment Type: Credit
Strike Prices: ITM for sold leg, OTM for 1st bought leg, further OTM for 2nd bought leg
Expiration Month: Same expiration month for all legs, it can be current month or longer term
Composition: Sell higher strike Put + Buy middle strike Put + Buy lower strike Put
| Bull Put Ladder Profile Chart | ||
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Bull Put Ladder is the extension of Bull Put Spread. Then, extend it again by buying even lower strike price. Therefore our net credit is reduced further in exchange for potential unlimited rewards.
When we apply Bull Put Ladder, the expectation can be either bearish or bullish. In Fact, it’s a slight variation from Put Ratio Backspread. The differences is that we use 3 strike prices for Bull Put Ladder while only 2 strike prices are used for Put Ratio Backspread. Also, Bull Put Ladder has wider breakeven point and better risk reward ratio.
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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 = Credit ($4,500)
Breakeven Point Down = Bought Leg (lower strike) + Net Credit = $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 = ($50,000) + $37,500 + $25,000 – ($4,500) = $17,000
Return of Investment = Profit @ Exit / Investment @ Entry = 378%
Worst Case Scenario : (Difference between Strike prices – Net Credit) x No of Contracts
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