Updated Januart 18, 2023
Today we will look at how to trade the Jade Lizard Options Strategy.
The Jade Lizard options strategy is a strategy for a new trader with a smaller account looking to limit your upside risk.
Today we will define the Jade Lizard option strategy. We will discuss when it is best used, how to construct the trade, and finally some thoughts about profit potential, when to close, and how to manage a trade with this strategy.
Jade Lizard Option Strategy The Jade Lizard option strategy is a slightly bullish option strategy that is designed to profit from a moderate rise in price of the underlying with less risk than other neutral strategies such as the short strangle.
Ideas on trading the Jade Lizard Options Strategy
What is the Jade Lizard?
In options trading, a Jade Lizard is a custom option strategy which consists of a bear vertical spread created using call options, with the addition of a put option sold at a strike price lower than the strike prices of the call spread. The strategy combines the sale of an out of the money short put and the simultaneous sale of a short call vertical spread. Provided the total premium collected is greater than the width of the call spread, there is no updside risk in this trade.
When do we use the Jade Lizard?
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 a high implied volatility rank (IVR). In a previous post we discussed the 3 most important factors to consider when you set up a trade. You can review that post here.
From a strategy point of view the jade lizard is very straight forward and comes with the one beneficial feature …No Upside Risk.
How to trade the Jade Lizard
First begin with a Bear Call Vertical
A bear call vertical consists of selling 1 out of the money (OTM) call and buying 1 further OTM call option. A trader would use the call vertical if he/she believed the underlying stock is likely to pull back from its current price.
The stock may have made a major up move and the trader feels it is time for a retracement. The max profit occurs if/when the underlying is below the short strike at expiration. The max loss is equal to the width of the spread minus the credit received. The Bear call spread is a defined risk strategy, which works well for new traders.
Then add the Short Put
The call vertical is changed into a Jade Lizard by adding an OTM short put to the spread. When yousell the OTM put, you receive a credit. As long as the total credit on the spread is greater than the width of the strikes in the call vertical, there can be no upside risk.
Earlier I said the max loss is the difference between the width of the strikes minus the credit received. If the call spread is $3.00 wide and the total credit received is $3.00, the difference is zero. Zero difference = zero risk.
Check out this discussion between DR. Jim Schultz and Kai Zhang on tastytrade From theory to practice .
What is the Max Profit for the Jade Lizard
The max profit for placing a trade is the credit received from opening the trade. Max profit is realized when the stock price is between the short strikes at expiration.
When do we close Jade Lizards?
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.
How do we manage the Jade Lizard?
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.
The Jade Lizard is an easy strategy to use, when you are neutral to slightly bullish on the underlying stock.
This is a neutral to slightly bullish trade that can be set up to have no upside risk.
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