Order Entry: Net Credit
Direction: Neutral/Slightly Bullish
Ideal Environment: High IV
Profit Target: 50%
Definition: A Jade lizard consists of simultaneously selling an OTM put while simultaneously selling an OTM call spread. The strategy looks to collect a total credit that is larger than the width of the call spread. Jade lizards are a way to play an underlying with a neutral to bullish assumption while taking no upside risk.
Jade Lizard Setup
Sell 1 OTM Put
Sell 1 OTM Call Spread
Sell 1 OTM Call (closer to ATM)
Buy 1 OTM Call (further from ATM)
The max profit for a jade lizard is the net credit received when the trade is put on. The best case scenario is the underlying stock price is between the short strikes at expiration.
Max Profit= Net Premium Received - Commissions Paid
Jade lizards do not have an upside breakeven price when set up correctly. To calculate the downside breakeven stock price for the trade, use the following formula:
Lower Breakeven Point = Strike Price of short put – Credit Received
Theoretically the max loss for a jade lizard would be if the underlying stock fell to $0. In that scenario, we would take the value of the ITM put and subtract the initial credit collected to calculate max loss.
Max Loss = (Strike Price of short put X 100 shares) – Credit Received
Suppose stock ABC is trading at $90 in July. An options trader neutral/bullish on ABC decides to enter a jade lizard position by selling a August 80 put for $72 and selling 95/96 call spread for $31, resulting in a net credit of $103.
If the price of ABC stock ends up at $94 at expiration. Both the OTM put and OTM call spread expire worthless. This is the maximum possible profit for the trade.
If the stock had fell to $78 instead, the $80 short put would be ITM and have an intrinsic value of $200 and the OTM call spread would be worthless. In this scenario, we would calculate our loss by taking the $200 loss and subtracting the $103 we collected at order entry. The entire trade would result in a $97 loss.
Let’s say the stock rallied to $100 at expiration. The great thing about jade lizards is the lack of upside risk. The call spread would be a full loser at $100, but the total credit received of $103 makes the trade a scratch after commissions.
When to use a Jade Lizard strategy?
At Tradezy, we recommend to use this strategy for stocks with a high implied volatility. The trader should have a short to intermediate neutral or bullish thesis. We look to sell the OTM call spread (30% of credit) and OTM put (70% of credit) for a credit larger than the width of the call spread. The goal is to buy back the put and spread back for 50% of max profit.