Strategies · Library · Options
§2.15Volatility
Bull put ladder
Sell a put near the money, buy a put at a lower strike, and buy another still lower. Usually the outcome of a bull put spread gone wrong: it now gains if the stock falls hard.
- Asset class
- Options
- Held for
- To expiry
- Data
- ARCANE has part of the data
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Turns bearish, wants a sharp drop to pay, and loses mostly in the zone between the strikes.
- Entry and exit
- Sell a near-the-money put; buy two further out-of-the-money puts at lower strikes, same expiry. Often built by adding the extra put to a losing bull put spread. Close at expiry or on a rebound.
- Sizing
- 1:1:1 (one short put, two long puts at lower strikes)
How it fails
- Maximum loss is limited and sits between the two lower strikes
- Large gain only if the stock drops past the lower breakeven
- If the stock rallies you keep a small credit or lose little
- Time decay can hurt the long puts
Data it needs
- options chain with strikes and premiums
- implied volatility by strike and expiry
- underlying daily price
ARCANE has the underlying daily close but no options chains, strikes or implied volatilities
How ARCANE uses it
Matches a Call that a price falls sharply below a level, a bearish tail view. Paper only.
Mixed long and short puts are not buildable.
Filed under the volatility card
Hold less after a month of high volatility and more after a calm one. The paper found this raised return per unit of risk, because volatile spells are not paid for with higher returns.
A paper plan from this card holds 5 to 63 days, stops at 2.5× the expected move and uses at most 50% of your risk budget. The card
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §2.15, p. 24 of the SSRN version. Described in our words. Volatility is ARCANE’s filing, not the book’s.