The Jade Lizard strategy might sound complex, but it's actually a combination of familiar options: a short put and a short call spread. Often used by beginners and experienced traders alike, it's a strategy for a neutral-to-bullish market outlook, particularly when prices are expected to stay within a range but with some upward potential.
Benefits and Risks:
Limited Profit Potential: The Jade Lizard is a "premium-only" strategy, meaning your maximum profit is capped at the initial premium you collect.
Downside Risk: This strategy involves selling a "naked put," which exposes you to potential losses if the stock price falls sharply.
Ideal Outcome: The sweet spot is for the stock price to land between the strike prices of your short put and short call spread at expiration. This allows the options to expire worthless and keeps your collected premium.
When to Use the Jade Lizard:
This strategy is ideal for traders who:
Believe a stock price will stay relatively stable (range-bound) with a slight upward bias.
Want to collect premium income while limiting potential profits.
Breaking Down the Jade Lizard:
The Jade Lizard combines three options trades, all expiring at the same time:
Selling a Put: This generates income but obligates you to buy the stock at a specific price if the price falls below that strike price by expiration.
Selling a Call Spread: This involves selling a higher-strike call option and buying a lower-strike call option. It limits your potential profit but also caps your potential loss on the short put.
(Optional) Buying a Call Option (for a bullish twist): Some variations add a long call option to this strategy for additional upside potential, but this increases overall cost.
We'll delve into a real-life example of the Jade Lizard strategy next to put this theory into practice.
Sell 1 XYZ 90 call for $1.40 in premium
Buy 1 XYZ 91 call for $1.00 in premium
Sell 1 XYZ 83 put for $0.80 cents in premium
The profit gained? = $1.20. How? +1.40 - 1.00 + 80 The stock must stay between both of the sells. In-between the call sell and the put sell.
Your maximum profit would be the $120 collected in premium if the underlying stock price stays in the sweet spot between the downside put at $83 and below the lower of the two calls—in this case, $90 a share. At expiration, if the market price should exceed the higher call at $91, you’ll lose, risk calculators are usually built into most brokers. The credit from the short put should be greater than or equal to the difference in the strikes of the spread, this will reduce the upside risk. The idea would be to get back from the put you sold, what the max loss would be on the call credit spread. Personally, I would not do this unless I would be ok with getting assigned on the equity I am doing the spread on. This is basically a cash secured put as well as a call credit spread. I would never do this on something like $NVDA. I would do this strategy on a stock priced like $MARA that I would like to own.
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THIS IS NOT FINANCIAL ADVICE
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