Long Put Ladder

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The Long Put Ladder, or bear 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 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.

The extra short put reduces the entry cost but adds substantial downside exposure. For a nonnegative stock, that loss remains finite at a stock price of zero.

Limited Profit Potential

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.

Try the Long Put Ladder Calculator

Loss potential

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

Breakeven Point(s)

There are 2 break-even points for the Long 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 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.

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.

Variable Ratio Write

Short Strangle (Sell Strangle)

Short Straddle (Sell Straddle)

Short Put Ladder

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.

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.