From Theory to Practice

Strategy Session: Jade Lizard

| Apr 28, 2016
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    From Theory to Practice

    Strategy Session: Jade Lizard

    Apr 28, 2016

    The jade lizard, a combination of a short OTM put and a short OTM call spread, is one of our go-to neutral/non-directional trades that takes advantage of the volatility skew in the market, although the lack of a long put covering your short put will create some long deltas. The key to this set up is to collect a total credit on the trade that exceeds the width of the short call spread. If you are able to do this, then this trade has no risk to the upside. For example, if you have a $1 wide short call spread, but you collected $1.10 when you originated the trade, then you are not exposed to any risk if the UL moves higher. The maximum value your short call spread could take is $1, and you collected $1.10, which leaves your worst-case scenario on an up move in the UL at a $0.10 profit.

    Our goal with this spread is for the UL to stay between our short strikes and for both short options to expire OTM. The most you can make on a jade lizard spread is the credit you have collected, and you are exposed to potentially unlimited losses from the naked short put. Your breakeven point will be your short put strike less the credit you have received.

    NOTE: During the video, when AMZN is pulled up in the analyze tab, you can see that the jade lizard has a few long deltas, which is why this is also considered a bullish strategy. I forgot to mention this in the video.

    This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.

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