The Short Put Ladder Strategy Guide

What View am I Expressing with a Short Put Ladder? 

As we can see from above, the Short Put Ladder expresses a long volatility view. Though the view itself is more specific, many other structures may express a long volatility view, such as a Straddle or Strangle.

What makes a Short Put Ladder unique? As seen from the position itself, we are expecting a significant move. What we do not expect is for the stock to do nothing or slowly trickle down (towards our maximum loss zone). We believe that the stock could blow to the downside. For this reason, we do not sell an additional put to make a Reverse Iron Condor.

Despite this, we cap our potential gains on the upside. This expresses the view that while we could see a large move up in the security, we do not expect any severe upside move. This view is important as it is very specific. If we do not have this view, a Short Put Ladder may not make sense, and another options structure may be better suited for our view.

For example, if we have no opinion on the skew and feel as though an extreme move to the upside and downside are equally probable, a Long Straddle may make more sense. In contrast, if we feel like a move to the downside will happen and are extremely bearish, a simple Long Put could provide higher returns if we are right.

Tips to Optimize Short Put Ladder Trades 

While an individual’s view on the underlying direction is specific to that person, there are a few conditions that generally make Short Put Ladders more effective.

  • Low Implied Volatility.

If Implied volatility is low, we can put this trade on for cheaper. We will then also benefit if implied volatility increases. As our long legs will gain more in value as volatility increases, our short leg will lose value.

  • Minimal Put Skew.

Put skew causes out-of-the-money put options to trade at higher implied volatility than the same delta call options. This harms us as we are selling lower implied volatility for our in-the-money put and buying higher implied volatility for our out-of-the-money put. Hence minimal put skew or even call skew would be more ideal for this trade.

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