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Jade Lizard Option Strategies
Overview
DEFINITION
A jade lizard is a slightly bullish strategy that combines a short put and a short call spread. The strategy is created to have no upside risk, which is done by collecting a total credit greater than the width of the short call spread.
DIRECTIONAL ASSUMPTION
IDEAL IMPLIED VOLATILITY ENVIRONMENT
PROFIT/LOSS CHART
SETUP
HOW TO CALCULATE MAX PROFIT / BREAKEVEN(S)
MAX PROFIT
Credit Received
Max profit is realized when the stock price is between the short strikes at expiration.
BREAKEVEN(S)
Upside:
When set up correctly, we have no risk to the upside.
Downside:
Strike Price of Short Put - Credit Received
tastylive Approach
A jade lizard is traded when a trader has a neutral to bullish assumption on a stock, but not extremely bullish since the position incorporates a short call spread.
The trade is suitable for stocks that have sold off and have high implied volatility rank (IVR). This allows for more premium to be collected, while having no upside risk if the underlying trades through the short call spread.
For traders who are very bullish on a stock that has sold off and has a high IVR, strategies such as short puts or covered calls may be more suitable.
CLOSE / MANAGE
WHEN TO CLOSE
The trade is closed for a winner by purchasing the options back for a net debit that is less than the credit collected at order entry. The first profit target is 50% of max profit, or half of the credit that was initially received at order entry.
WHEN TO MANAGE
If the stock trades through the short call spread, the short put can be rolled up to collect more credit. However, since there is no upside risk when trading jade lizards, this adjustment isn’t entirely necessary.
If the stock sells off and tests the short put, the short call spread can be rolled down to collect more credit without increasing the upside risk.
In the worst case scenario, a trader can close the entire position for a loss if the loss on the short put becomes too large.
SUPPLEMENTAL CONTENT
Episodes on Jade Lizard
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