Bull Put Ladder Strategy
A three-leg credit strategy: short an ATM put, long two OTM puts at lower strikes. Typically used to adjust a bull put spread when the stock declines, converting to a bearish position.
Overview
The bull put ladder is a three-leg options strategy that extends a bull put spread. You sell an ATM put (K₁), buy an OTM put (K₂), and buy another put at an even lower strike (K₃).
This strategy typically arises when a bull put spread goes wrong—the stock trades lower. The trader adds a third leg (long put at K₃) to convert the position from bullish to bearish, profiting if the stock continues to decline.
It's usually entered for a net credit (H < 0). Max profit occurs if the stock crashes below the lower breakeven. The risk zone is between K₂ and K₁ where you're exposed to limited but significant losses.
Key Insight
Position Structure
Formulas
Key Insight
Credit strategy with a "valley" of max loss between K₂ and K₃. Profits above K₁ (credit kept) or below the lower breakeven (bearish payoff). Often used to adjust a failing bull put spread.
Research
Research on multi-leg options strategies, vertical spreads, and position adjustments.
The Mathematics
In Plain English
The math behind this strategy is straightforward. Here's what you're actually doing:
- 1At expiration: The payoff depends on where the stock lands relative to the three strikes K₁ > K₂ > K₃.
- 2Above K₁: All puts expire worthless. Keep the net credit received.
- 3Between K₁ and K₂: Short put has value, long puts worthless. Loss zone.
- 4Between K₂ and K₃: One long put offsets short put. Loss capped.
- 5Below K₃: Second long put adds profit. Gains increase as stock falls.
That's it. The formulas below just express this process precisely.
1Payoff at Expiration
Two long puts minus one short put minus net premium. K₁ > K₂ > K₃.
2Upper Breakeven
Stock price where profit turns to loss. Since H < 0 (credit), this is below K₁.
3Lower Breakeven
Stock price where losses turn to profits on the downside.
4Maximum Profit
Achieved when stock goes to zero. Both long puts fully in the money.
5Maximum Loss
Occurs between K₂ and K₃. The spread width minus credit received.
Bull Put Ladder vs Bull Put SpreadNote
A bull put spread (short K₁ put, long K₂ put) has limited profit (credit) and limited loss. Adding the third long put at K₃ creates a "ladder" that profits from a continued decline. This is typically done as an adjustment when the original bull put spread is threatened by falling prices.
Strategy Rules
Position Setup
- 1Sell 1 ATM put at strike K₁ (closest to current price)
- 2Buy 1 OTM put at strike K₂ (e.g., 5% below K₁)
- 3Buy 1 OTM put at strike K₃ (e.g., 10% below K₁)
- 4All options same expiration (typically 30-45 days)
- 5Verify K₁ > K₂ > K₃ with equal spacing preferred
Entry Conditions
- Often used as adjustment to failing bull put spread
- Enter when expecting stock to continue declining
- IV relatively high (better premium on short put)
- Calculate both breakevens before entry
- Ensure net credit received (H < 0)
Risk Management
- 1Max loss occurs between K₂ and K₃—the "valley"
- 2Close if stock stabilizes in the loss zone
- 3Monitor position delta as stock moves
- 4Consider rolling if near expiration in loss zone
- 5Have exit plan before entry
Exit Strategies
- Let expire above K₁ to keep full credit
- Close below K₃ to lock in downside profit
- Exit if stock settles in loss zone (K₂ to K₃)
- Roll to later expiration if thesis unchanged
- Close early if volatility drops significantly
Implementation Guide
The bull put ladder is often entered as an adjustment to an existing bull put spread, adding the third leg when the original trade moves against you.
Assess the Situation
This strategy is typically used when a bull put spread is under pressure. The stock has declined toward or below K₂, and you believe it will continue falling. Adding the third long put converts to a bearish position.
- Evaluate if continued decline is likely
- Compare cost of adding K₃ put vs closing the spread
- Check if adjustment makes mathematical sense
Select the Third Strike
Choose K₃ below K₂, typically with equal spacing. The lower the strike, the cheaper the put but the further the stock must fall to profit. Balance cost vs probability.
- Equal strike spacing simplifies P&L calculation
- Lower K₃ = cheaper put but needs bigger move
- Consider support levels for strike selection
If the stock stabilizes between K₂ and K₃, you're in the maximum loss zone. Only add the third leg if you're confident in continued decline.
Execute the Adjustment
If adjusting an existing spread, simply buy the K₃ put. If entering fresh, execute all three legs as a combo order. Verify you receive a net credit.
- Use limit orders for the K₃ put
- Check total position Greeks after adjustment
- Confirm net credit/debit matches expectations
Monitor the Position
Track the stock closely. Above K₁ you keep the credit. Below K₃ minus the lower breakeven, you profit from the decline. Between K₂ and K₃ is the danger zone.
- Know your breakeven points precisely
- Be ready to close if stock stabilizes in loss zone
- Watch for assignment risk on short put
Margin Requirements
The short put at K₁ requires margin. However, the long put at K₂ caps the risk between K₁ and K₂. The third long put (K₃) may reduce margin slightly or have no margin impact depending on your broker's calculation method.
Helpful Tools & Resources
Strategy Variations
Explore different ways to implement this strategy, each with its own trade-offs and benefits.
Bear Call Ladder
The call-side equivalent: short ATM call, long two OTM calls. Credits received, profits from sharp rally.
Put Ratio Backspread
Buy 2 puts at lower strike, sell 1 put at higher strike. Similar downside profit potential.
Broken Wing Put Butterfly
Asymmetric butterfly with unequal wings. Can create similar payoff profile with different risk/reward.
Skip-Strike Ladder
Non-consecutive strikes create wider profit/loss zones. Trade-off is different premium dynamics.
Risks & Limitations
Maximum loss occurs when stock settles between K₂ and K₃. The "valley" in the payoff diagram.
Short put may be assigned early if deep ITM, especially around ex-dividend dates.
If stock stops declining and settles in loss zone, time decay works against you.
Adding third leg costs premium. If stock rebounds, the K₃ put expires worthless.
Three-leg position requires careful monitoring and understanding of multiple scenarios.
References
- Chaput, J. S., & Ederington, L. H. (2003). Option Spread and Combination Trading. Journal of Derivatives, 10(4), 70-88 [Link]
- Ni, S. X., Pan, J., & Poteshman, A. M. (2008). Volatility Information Trading in the Option Market. Journal of Finance, 63(3), 1059-1091 [Link]
- Chen, Y., & Li, D. (2017). Margin Calculation of Multi-Leg Option Strategies. Working Paper, SSRN [Link]
- Li, S. (2022). Inferring Complex Strategies from Intraday Multi-Leg Options Trades. Working Paper, SSRN [Link]
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