How to Eliminate Upside Risk Trading the Jade Lizard Options Strategy in 2024

Updated Januart 18, 2023

Today I want to talk about the Jade Lizard Options Strategy. If you are looking to take advantage of trading a liquid stock that has pulled back significantly and has a high volatility rank, then the Jade Lizard can offer several advantages.This strategy offers no upside risk, a limited downside, a high probabiliy of profit, a trade that can be adjusted based on your market outlook and risk tolerance, and a good strategy for generating income.

So let’s take a look and see how this strategy can work for you..


What is the Jade Lizard?

The Jade Lizard is an options strategy designed to have no risk to the upside and limited risk to the downside, making it an attractive strategy for traders who believe the underlying asset will trade flat or slightly up. The goal is to earn premium income from the sold options. The strategy involves selling a put option, while also selling a call spread on the same underlying asset with the same expiration date.

Why trade this strategy

A Jade Lizard can be used when a trader has a neutral to bullish assumption on a stock, but not extremely bullish since the position incorporates a short call spread, which limits the upside. From a strategy point of view the Jade Lizard is very straight forward and comes with several advantages:

  • No Upside risk – there is no risk, if the stock price goes up, which is not the case with many options strategies.
  • Income Generation – the Jade lizard is a good way to generate options premium, especially in a flat to slightly bullish market.
  • Manadable downside risk – The risk is defined and limited to the strike of the put
  • High Pobability of Profit: the jade lizard has a high probabiliy of profit beause it earns money as long as the stock price stays above the put strike price t expiration.
  • Flexibility: the strategy can be adjusted based on your market outlook and risk tolerance.

Trade setup and Management

The Jade Lizard combines the sale a short put and a short call spread. This is neutral to bullish stratrgy that takes advantage of Options Skew. When volatility is high becuse the stock is at the lower end of its range puts tend to trade rich and call spreads are trading expensive.

Essentially you are collecting enough premium to offset any upside risk.

You make a profit if the stock goes down small, stays the same or goes up. The “potential” profits are capped.

If the stock blows through the short call spread , the max profit (premium collected) is reduced by the width of the spread. This is why you must collect a premium greater than the width of the spread.

If the call spread Is breached you can always roll up the put to collect more premium just like you would with a strangle.

If the PUT is breached, the call spread can be rolled down, or sold and a new call can be written with a delta 1/2 of the short put.

Here is an example

Let’s say XYZ is trading at $50. It has pulled back and you believe there is room for an upside move. You look at the options chain for a 45 day expiration and see that the calls are trading higher than the equidistant puts. This Skew indicates there is risk to the upside and this can support your upside bias.

When volatility is high, call spreads trade richer than put spreads, and puts tend to trade richer than calls. The Jade Lizard takes advantage of this pricing anomaly.

This first thing we do is look for a Short call above the current price and a long call $2 higher. We put on the spread first because it is defined riskThe two dollar width of the strikes is the max loss on the spread. We always look to collect at least 1/3 the width of the spread in premium. In this example we want at least $.67 so that the total credit is at least $2.00.

Next, we sell an out-of-the-money put. We need to collect at least $1.33 and potentially more. Lets’ say we can collect $1.75 for the short put. Our total credit in this example would be $2.42. The width of the call vertical strikes is $2.00 Earlier I said the max loss is the difference between the width of the strikes minus the credit received. If the call spread is $2.00 wide and the total credit received is $2.42, the difference is +$.42. = zero risk to the upside.

How to manage the Jade Lizard

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. Here is a handy graphic you can use to manage any defined or undefined risk trade.

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.

Check out this discussion between DR. Jim Schultz and Kai Zhang on tastytrade From theory to practice .

Final thoughts

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. In addition, The Jade Lizard offers income generation, manageable downside risk, flexibility, and a high probability payoff.

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