The Bear Put Ladder Trading Strategy for Negative and Volatile Market Expectations

What is a Bear Put Ladder Option Strategy?

A bear put spread is a form of trading options strategy. An investor or trader anticipates a reasonable drop in a security or asset price and wishes to lower the cost of holding the option deal. A bear put spread forms when the investor buys put options and simultaneously sells the same amount of puts on the same asset with the same expiration date but a lower strike price. The maximum profit from this approach is equal to the difference in strike prices, less the net cost of the options.

Methodology Bearish Long Put Strategy

The bear put ladder spread is the most complicated technique, requiring three transactions. You need to buy put options superficially to profit if the underlying security's price falls beyond the projection. In addition, you must write an equal number of puts at a lower strike and another similar number of puts at an even lower strike.

You write options to balance the cost of the ones you buy essentially. In general, you should make the three transactions simultaneously.

When establishing the spread, you must pick which strikes to utilize. A reasonable rule is to buy puts at or near the money and write one batch of puts with a strike equal to roughly where you estimate the underlying security's price will fall. The next lowest strike should follow the batch of written puts.

The lower the strike prices of the options you write, the less money you will receive when you write them. On the other hand, lower strikes will provide you with a higher potential profit, so it's a bit of a trade-off. The contracts should all have the same expiration date.

For Example,

First, we will assume that Company ABC's stock is now trading at ₹100 and that your projection is for the stock to fall to roughly ₹90, but no lower. You would place the orders shown below with your broker.

Scroll down to know how much money to use for the trade without including commissions.

The ₹400 spent is compensated mainly by a ₹140 credit for contract drafting. As a result, you have established a debit spread with a total cost of ₹260. We may now assess the potential earnings and losses that this plan could generate.

Probable Profits and Losses

The potential profit is minimal, and you can make the highest profit when the security (in this case, Company ABC'S stock) falls in price to somewhere between the strike prices of the put options placed (in this case, ₹88 and ₹90).

If the share falls below the shortest strike (₹88), earnings will begin to dwindle, and the position may potentially become a loss if the price drops low enough. If the security's price does not decline or rise, the initial investment (₹260) is lost. We've included some instances of probabilities in a variety of settings.

Construction Long Put Ladder

A Long Put Ladder forms by purchasing one ITM Put, selling one ATM Put, and purchasing one OTM Put of the same underlying securities with the same expiry. You can adjust the strike price to the trader's preference. A trader can also begin the Short Put Ladder technique by purchasing one ATM put, selling one OTM put, and selling one Far OTM put.

For Example,

The Nifty is at 9500. And the expectation is that the Nifty will expire between 9500 and 9400 strikes. You can therefore enter a Long Put Ladder by buying the 9600 Put strike price at ₹360, selling the 9500 Put strike price at ₹210, and selling the 9400 Put for ₹90.and the net premium of ₹60. The maximum profit from the above Example is ₹21000 (140*150). If the underlying assets expired within the range of strikes purchased, it would only happen. The maximum loss is limitless if it falls below the lower breakeven threshold. However, if the Nifty rises over the higher breakeven price, and will restrict the loss to ₹9000 (60*150).

For easy understanding, follow the table below:

The Payoff Schedule for the Above Example is as follows:

The Payoff Schedule

Benefits and Merits of Bearish Put Ladder Option

Benefits

• One of the most beneficial aspects of this technique is reducing the upfront fees associated with exercising the options. As a result, even if the security price falls, the investor can still earn significantly.

• There is much room for profit in this technique because of the flexibility they can take positions.

• Investors can easily alter the security's strike price to get the desired gains based on their estimates and information.

Disadvantages

• It is the unlimited loss that the investor will have to endure when it comes to disadvantages if the strategy does not work out as planned. If the investment price falls by a large enough margin, the investor will suffer huge losses.

• Furthermore, using three transactions increases the amount paid to the broker in commissions.

As a result, this is not a good technique for beginners. This method is only for experienced investors who can tie up margins in their accounts.

Conclusion

If an investor is particular about how security may decline, they can surely use this approach and make a profit on their investment. This approach is unquestionably sophisticated, but it promises to repay investors handsomely if they are ready to take the risk and invest the money.