Bear Put Ladder
Description
The Bear Put Ladder is an extension to the Bear Put Spread. By shorting another put
at a lower strike price, the position assumes uncapped risk potential if the stock
plummets downwards. Again, the problem is that now it’s not totally clear if we
have a bullish or bearish strategy, so we have to designate it as a direction neutral
strategy! We’d love the stock to fall to the middle strike price but not below the lower
short put strike price. Anywhere in between the middle and higher strike is ideal.
Because of the dangers of uncapped risk, this strategy becomes more appropriate
for a short-term income trade. The net effect of the lower short strike is to reduce the
cost and breakeven of the Bear Put Spread and adjust the directional nature of the
trade. The lower put strike prices are further OTM and will therefore have lower
premiums than the higher strike bought put.
So, in summary, if the stock rises above the higher (buy) strike, you can make a
loss; if the stock falls to anywhere between the middle and lower (short) strikes, you
make your maximum profit; if the stock falls below the lowest strike, then you can
make unlimited losses. The extra leg also ensures that you may have two breakeven
points.
P/L Profile
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