Bullish Patterns
Long Calls
Bull Call Spread
Bull Put Spread
Call Backspread
Long Call Ratio Spread
Naked Put
Synthetic Long Stock
The Collar
Covered Calls
Synthetic Long Call
Synthetic Short Put
Covered Straddle
Covered Strangle
Married Put
Protective Put

Bearish Patterns
Long Puts
Bear Put Spread
Bear Call Spread
Put Backspread
Long Put Ratio Spread
Naked Calls
Synthetic Short Stock
Synthetic Short Stock (split strikes)
Covered Put
Protective Call
Synthetic Short Call
Synthetic Long Put

Long Volatility
Long Straddle
Long Strangle
Short Call Butterfly
Short Put Butterfly
Short Iron Butterfly
Short Call Condor
Short Put Condor
Short Iron Condor
Long Guts
Short Call Ladder
Short Put Ladder
Long Call Synthetic Straddle
Long Put Synthetic Straddle

Short Volatility
Short Straddle
Short Strangle
Long Call Butterfly
Long Put Butterfly
Long Iron Butterfly
Long Call Condor
Long Put Condor
Long Iron Condor
Short Guts
Long Call Ladder
Long Put Ladder
Call Ratio Spread
Short Call Ratio Spread
Put Ratio Spread
Short Put Ratio Spread
Ratio Call Write
Ratio Put Write
Short Call Synthetic Straddle
Short Put Synthetic Straddle
Variable Ratio Write

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Short Put Ladder

Risk: limited
Reward: limited but very big

General Description
Entering a short put ladder entails buying (1) lower strike put, buying (1) middle strike put and selling (1) higher strike put (same expiration month). It's essentially a bull put spread with an additional long put at a lower strike.

(draw a short put ladder risk diagram here)

The Thinking
Your analysis tells you a big move is coming, and you favor the downside. You enter a bull put spread which has limited profit potential to the upside, and then buy an extra put that has virtually unlimited profit potential to the downside (the stock can't go below 0). If the stock rallies above the highest strike, you'll profit (the gain from the bull put spread will be greater than the loss from the long put). But ideally the stock tanks, and your profit from the long put more than makes up for the loss of the bull put spread.

XYZ is at $55. Your research says a big move is coming, and you favor the downside because the overall market is moving in that direction. You enter a bull put spread by selling (1) 60 put for $7.00 and buying (1) 55 put for $3.00. Then you buy (1) 50 put for $1.00. The entire trade is initiated with a net credit of $3.00.

Above $60 (the highest strike), all puts expire worthless, and your profit is the net credit received when the trade was initiated.

Below $50 (the lowest strike), all puts expire in-the-money. The profit from one of your long put legs will be canceled out by the loss from your short put, and then the remaining long put will increase in value point-for-point with the stock. For example, at $45, the 60 put will be worth $15.00 ($8.00 loss), the 55 put will be worth $10.00 ($7.00 profit) and the 50 put will be worth $5.00 ($4.00 profit). The net is a $3.00 profit.

Between the two lower strikes ($50 and $55), the max loss is suffered. That’s where the profit from the short put will not be enough to offset the loss from the two long puts. For example, at $55, the 60 put will be worth $5.00 ($2.00 profit), the long puts will expire worthless ($3.00 loss on the 55, $1.00 loss on the 50). The net of this is a $2.00 loss.

The PL chart below graphically shows where this trade will be profitable and at a loss.