Short Put Ladder

The Short Put Ladder, or bull put ladder, is a limited profit, limited risk strategy in options trading that is employed when the options trader thinks that the underlying security will experience significant volatility in the near term.

To setup the Short Put Ladder, the options trader sells an in-the-money put, buys an at-the-money put and buys another lower strike out-of-the-money put of the same underlying security and expiration date.

Profit potential

Calculate these amounts and use the largest: Middle strike price plus lowest strike price minus highest strike price minus net opening cost; Zero minus net opening cost.

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Limited Risk

Maximum loss for the Short 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 bought. At this price, while both the short put and the higher strike long put expire in the money, the short put is worth more than the long put, resulting in a loss. The loss can be calculated using the formula below.

Breakeven Point(s)

There are 2 break-even points for the Short Put Ladder position. The breakeven points can be calculated using the following formulae.

Example

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

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

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 profit will be the initial $300 credit received when entering the trade.

However, if the stock price had dropped to $25 instead, all the put options will expire in the money. The long JUL 40 put will expire with $1500 in intrinsic value while the long JUL 35 put will expire with $1000 in intrinsic value. Buying back the short JUL 45 put will only cost the options trader $2000 so he still have a gain of $500 when closing the position. Together with the initial credit of $300, his total profit comes to $800. This profit could have been greater if the stock had dived below $25.

These examples use standard U.S. stock options with a 100-share contract size and matching expiration dates. Related structures can use ETF, index or futures options, but contract multipliers, exercise style, settlement and the underlying price range can differ. A stock’s zero price floor must not be assumed for every futures contract.

Commissions

For ease of understanding, these examples exclude commissions, fees and financing costs. Include all costs when comparing an actual position; there is no universal commission amount.

For active traders, transaction costs can consume a significant part of returns. Compare the full commission and fee schedule, exercise and assignment charges, and bid-ask spreads. The cost of entering and closing every leg matters.

Similar Strategies

The following strategies offer related market exposure. Compare their construction, cost, maximum loss and assignment obligations; a similar outlook does not mean identical risk.

Strip

Strap

Short Call Ladder

Long Put Ladder

The converse strategy to the Short Put Ladder is the Long Put Ladder. Long put ladders are employed when little or no movement is expected of the underlying stock price.

Before expiration and assignment

The diagrams and worked outcomes describe expiration payoffs, not an option’s market price before expiration. Time decay, implied volatility, rates, dividends and bid-ask spreads affect early closing values. American-style short options can be assigned early; a protective long option is not automatically exercised when a short leg is assigned. Closing or exercising one leg can change the remaining position’s risk.