Jade Lizard Options Strategy: Should You Trade It?
The Jade Lizard strategy combines a short put with a call credit spread. It is suitable for traders with a neutral to slightly bullish outlook on the market. When implemented correctly, the Jade Lizard has no upside risk, meaning you cannot lose more than your initial investment in this trade, regardless of how high the stock moves.
This article will explain the Jade Lizard options strategy, how it works, and how to implement it step by step. You can also read more about the reverse Jade Lizard, otherwise known as the twisted sister options strategy.
What is the Jade Lizard Options Strategy, and How Does It Work?
The Jade Lizard options strategy is a combination of a short put option and a bear call spread. The trade is bullish and will have no upside risk if you collect more credit than the width of the call credit spread.
For example, if your call credit spread is $2 wide, you must collect at least $2 of premium to make the trade risk-free to the upside.
The Jade Lizard options strategy works best when you have moderate bullish or neutral expectations about the stock. The main risk of the Jade Lizard is the short put which comes with undefined risk. Here is an example of how to set up a Jade Lizard.
Sell 1 XYZ 52 call for $2 in premium
Buy 1 XYZ 53 call for $1 in premium
Sell 1 XYZ 45 put for $1 in premium
In this example, your total net credit received is $2, which is larger than the width of the $1-wide call credit spread.
Jade Lizard on tastytrade
What are the Advantages and Disadvantages of the Jade Lizard Options Strategy?
The Jade Lizard options strategy has several pros and cons you should be aware of before using it. Here are some of the main advantages and disadvantages of this strategy:
Pros
No upside risk. The Jade Lizard options strategy has no upside risk, meaning that you cannot lose money regardless of how high the stock moves. This is because the total premium collected from the sale of the naked put and the credit call spread is greater than the width of the call spread. Therefore, even if the stock price rises above the higher strike price of the call spread, you will still keep the net premium as profit.
High probability of profit. The Jade Lizard options strategy has a high probability of profit, meaning there are more scenarios where you can make money than lose money. This is because the strategy profits from a wide range of stock price movements as long as the stock price stays between the short strikes at expiration.
Positive theta decay. The Jade Lizard options strategy mostly profits from time decay, which occurs as the expiration date approaches. Time decay is the decrease in the value of an option due to the passage of time. Since you are selling more options than you are buying, you will benefit from time decay as long as the stock price stays within your breakeven points.
Cons
High downside risk. The Jade Lizard options strategy has a high downside risk, meaning you can lose a lot of money if the stock price falls below the puts’ strike price. This is because you are selling a naked put, which has unlimited loss potential. Therefore, you should only use this strategy with stocks that you are willing and able to buy at the strike price if assigned.
High margin requirement. The Jade Lizard options strategy requires a high margin requirement, meaning that you need to have enough cash or securities in your account to cover your potential losses. This is because you are selling a naked put, which exposes you to undefined risk. The margin requirement can vary depending on your broker and account type, but it is usually calculated as a percentage of the underlying stock value minus the net premium received.
Complex position management. The Jade Lizard options strategy requires complex position management, meaning that you need to monitor and adjust your position frequently to avoid losses or lock in profits. You also need to be aware of early assignment risk, which occurs when the buyer of an option exercises it before expiration.
How to Implement the Jade Lizard Options Strategy Step by Step
Now that you know the Jade Lizard options strategy and its pros and cons, let’s see how to implement it step by step.
1. Selecting the Underlying Asset
The first step is to choose an underlying asset suitable for the Jade Lizard options strategy. You should look for an underlying asset that has high liquidity, high implied volatility, and a clear trend or range.
The most liquid options you can trade are on the $SPY and $SPX since they have the most trading volume. However, you can implement the Jade Lizard on any ticker with options.
2. Determining the Strike Prices
The next step is to select the strike prices for the short put and the bear call spread based on your risk tolerance, market outlook, desired return, etc. You can adjust the strike prices to make the strategy more or less aggressive, more or less conservative, more or less bullish, etc.
Here are some guidelines and formulas for choosing the optimal strike prices:
For the short put, you can choose a strike price below the current stock price you are comfortable buying if assigned. You can use a delta of 0.20 to 0.30 as a reference point, meaning you have a 20% to 30% chance of being assigned. The lower the strike price, the lower the premium received, but also the lower the risk.
For the bear call spread, you can choose a strike price for the short call that is above the current stock price and that you are comfortable selling the stock at if assigned. You can use a delta of 0.20 to 0.30 as a reference point, meaning you have a 20% to 30% chance of being assigned. The higher the strike price, the lower the premium received, but also the lower the risk.
For the long call, you can choose a strike price within a few points of the short call. This will usually allow you to collect more premium than the width of the strikes and have no upside risk.
The total premium collected should be greater than the width of the call credit spread. This will ensure that you have no upside risk.
3. Risk Management
The final step is to manage the risk of the Jade Lizard options strategy using techniques such as stop-loss orders, position adjustments, rolling, closing, etc.
Here are some scenarios and examples for applying these techniques:
If the stock price rises above your breakeven point on the upside, you can either close your position for a small loss or roll up your bear call spread to a higher strike price.
If the stock price falls below your breakeven point on the downside, you can either close your position for a small loss or roll down your short put to a lower strike price.
If the stock price stays within your breakeven points, you can either hold your position until expiration and collect the maximum profit or close your position early for a smaller profit. This will reduce your exposure to time decay and volatility changes but also reduce your return on risk.
Jade Lizard vs. Iron Condor
The Jade Lizard and iron condor are similar strategies that involve selling two OTM options to collect premium. However, the main difference between the iron condor and the Jade Lizard is the iron condor uses a put credit spread to limit downside exposure while the Jade Lizard uses a naked short put.
Therefore, the Jade Lizard will use more margin requirements and have more downside risk than an iron condor. Additionally, you are more likely to be assigned when trading the Jade Lizard since there is no long put protection.
Conclusion
The Jade Lizard options strategy is an advanced technique that combines the short put and a call credit spread. When used properly, the Jade Lizard has no upside risk, meaning that you will not lose money regardless of how high the stock moves.
To implement the Jade Lizard strategy correctly, you must collect more credit than the width of the call credit spread to ensure you don’t have upside risk.
However, you should also be aware of its risks and complexities and only use it with stocks that you are willing and able to buy or sell at the strike price if assigned. You should also have a good understanding of options trading and its concepts before using this strategy, as it involves multiple legs.
FAQ
What is a jade lizard strategy?
A jade lizard strategy is an advanced options strategy that combines the short put and the call credit spread. When implemented properly, there is no upside risk with a Jade Lizard.
How to exit a jade lizard?
To exit the Jade Lizard, most brokers will allow you to close all the legs in a single order. To do this, you must right-click your position and click close position. Alternatively, you can buy to close the short call and short put, then sell to close the long call option.
What is the big lizard trading strategy?
The big lizard trading strategy is a variation of the jade lizard trading strategy that involves selling a straddle instead of a strangle. A straddle is an option strategy that involves selling a call and a put with the same strike price and expiration date.
What is the opposite of a jade lizard?
The opposite of a jade lizard is a twisted sister, which is an option strategy that involves selling a put credit spread and a naked call.
