The Jade Lizard is a rather unknown Option strategyHowever, it is relatively easy to understand, provided you already know the basics of options trading. The trade is a combination of a vertical spread and a naked option. How exactly a Jade Lizard is structured and when its use can be useful, you will learn in this article.
Definition Jade Lizard
The Jade Lizard is an option strategy in which a Short Put with a Bear Call Spread is combined. In the process, an out-of-the-money Put option sold and at the same time sold an out-of-the-money call option, as well as another Call option purchased with a higher base price.
What to look for when trading a Jade Lizard
The Jade Lizard is usually set up in such a way that no loss is incurred if the underlying rises above the strike price of the long call. For this purpose, the collected premium of the short put and the bear call spread must be greater than the width of the spread.
For example, if you trade a Jade Lizard on a stock and the width of the spread is 2.50 USD, the maximum loss of the spread is 250 USD. If the total premium collected is greater than 250 USD, there is no risk on the upside.
Maximum loss
The maximum loss is unlimited downwards, just like with a short put. Therefore, when trading a Jade Lizard, it is important to follow strict risk management. As a rule, options traders close the trade as soon as the loss exceeds a certain amount, or as soon as the price falls below a previously defined level.
Maximum profit
The Jade Lizard is a neutral to bullish strategy. You achieve the highest possible profit if all traded options expire worthless. For this to happen, the underlying must be quoted between the strike prices of the two sold options on the expiration date, i.e. above the strike price of the short put and below the strike price of the short call or bear call spread.
Break Even Point
The break even point can be calculated by subtracting the price of the trade from the strike price of the short put.
Implied volatility and time value decay
Just like other option writer strategies, the Jade Lizard benefits from the time value decline of the options. In addition, a decline in the implied volatility positive, which is why the trade is ideally set up in an environment of high implied volatility.