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The long put ladder, or bear put ladder, is a limited profit, unlimited risk strategy in options trading that is employed when the options trader thinks that the underlying security will experience little volatility in the near term. To setup the long put ladder, the options trader purchases an in-the-money put, sells an at-the-money put and sells another lower strike out-of-the-money put of the same underlying security and expiration date.

Long Put Ladder Construction |

Buy 1 ITM Put Sell 1 ATM Put Sell 1 OTM Put |

The long put ladder can also be seen as an extension of the bear put spread by selling another lower striking put. The purpose of shorting another put is to further finance the cost of establishing the spread position at the expense of being exposed to unlimited risk in the event that the underlying stock price crashes.

Maximum profit for the long put ladder strategy is limited and occurs when the underlying stock price on expiration date is trading between the strike prices of the put options sold. At this price, while both the long put and the higher strike short put expire in the money, the long put is worth more than the short put. The profit can be calculated using the formula below.

The formula for calculating maximum profit is given below:

- Max Profit = Strike Price of Long Put - Strike Price of Higher Strike Short Put - Net Premium Paid - Commissions Paid
- Max Profit Achieved When Price of Underlying is in between the Strike Prices of the 2 Short Puts

Long Put Ladder Payoff Diagram

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Losses is limited to the initial debit taken if the stock price rallies above the upper breakeven point but large unlimited losses can be suffered should the stock price makes a dramatic move to the downside below the lower breakeven point.

The formula for calculating loss is given below:

- Maximum Loss = Unlimited
- Loss Occurs When Price of Underlying < Total Strike Prices of Short Puts - Strike Price of Long Put + Net Premium Paid
- Loss = Lower Breakeven - Price of Underlying + Commissions Paid

There are 2 break-even points for the long put ladder position. The breakeven points can be calculated using the following formulae.

- Upper Breakeven Point = Strike Price of Long Put - Net Premium Paid
- Lower Breakeven Point = Total Strike Prices of Short Puts - Strike Price of Long Put + Net Premium Paid

Suppose XYZ stock is trading at $40 in June. An options trader executes a long put ladder strategy by buying a JUL 45 put for $600, selling a JUL 40 put for $200 and a JUL 35 put for $100. The net debit required for entering this trade is $300.

Let's say XYZ stock remains at $40 on expiration date. At this price, only the long JUL 45 put will expire in the money with an intrinsic value of $500. Taking into account the initial debit of $300, selling this put to close the position will give the trader a $200 profit - which is also his maximum possible profit.

In the event that XYZ stock rallies and is trading at $45 on expiration in July, all the puts will expire worthless and the trader's loss will be the initial $300 debit taken to enter the trade.

However, if the stock price had dropped to $25 instead, all the put options will expire in the money. The short JUL 40 put will expire with $1500 in intrinsic value while the short JUL 35 put will expire with $1000 in intrinsic value. Selling the long JUL 45 put will only give the options trader $2000 so he still have to top up another $500 to close the position. Together with the initial debit of $300, his total loss comes to $800. This loss could have been worse if the stock had dived below $25.

*Note: While we have covered the use of this strategy with reference to stock options, the long put ladder is equally applicable using ETF options, index options as well as options on futures.*

For ease of understanding, the calculations depicted in the above examples did not take into account commission charges as they are relatively small amounts (typically around $10 to $20) and varies across option brokerages.

However, for active traders, commissions can eat up a sizable portion of their profits in the long run. If you trade options actively, it is wise to look for a low commissions broker. Traders who trade large number of contracts in each trade should check out OptionsHouse.com as they offer a low fee of only $0.15 per contract (+$4.95 per trade).

The following strategies are similar to the long put ladder in that they are also low volatility strategies that have limited profit potential and unlimited risk.

The converse strategy to the long put ladder is the short put ladder. Short put ladders are employed when substantial movement is expected of the underlying stock price.

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