The Short Put Ladder Strategy Guide

There are numerous options structures an investor can choose. This article will provide an overview of one of these structures, the Short Put Ladder. First, we will give an overview of the position. We will then discuss when it is best to implement them in a portfolio. Let’s get started.

The Basics, What is a Short Put Ladder?

A Short Put Ladder Consists of 3 parts or legs. To create a Short Put Ladder, we must have the following:

  • Short 1 in-the-money put.
  • Long 1 at-the-money put.
  • Long 1 out-of-the-money put.

The Short Call Ladder Visualized 

An example is illustrated below using Home Depot (HD). Here we have the structure of a short 350 put, a long 325 put, and a long 290 put.

option ladder

As we can see, our Short Put Ladder has a risk-defined structure. Our maximum risk on this trade would have Home Depot on expiration trading in the $290-325 range. This would result in a loss of $1,290.

On the upside, we could make 1-1 risk to reward if Home Depot were to move above $350. On the downside, we would have the potential for unlimited profits after our break-even point of $277.

So what are the greek exposures of this structure? Well, most importantly, we are long volatility. To show this, I increased volatility by 5% without changing anything else. The position is up considerably, as shown below.

short put ladder strategy

With only a 5 point increase in volatility, we would already be up over $200. So, what is the catch? Well, a decrease in volatility would cause the opposite effect.

Another downside to this position is theta decay. Here I left volatility unchanged, but moved the position forward a few months. We now only have one month until expiry in the example. We can see below that we are now losing money. Our instantaneous P&L has started to converge upon our blue expiration P&L.

short put ladder option strategy

Even though this structure may look visually appealing initially, we have to remember that it can take on a less appealing form as the position evolves. While this is a bad case scenario, it will be a common outcome for Short Put Ladders due to the potential rewards on the trade.

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