The Jade Lizard: | Market Measures
Apr 27, 2016
The jade lizard may sound like an artifact from the Han Dynasty, but it's actually a relatively simple options strategy that may represent a good starting point for your next financial excursion.
Let’s start by breaking this subject down into a very simple concept: a jade lizard combines a short OTM put and a short OTM call vertical in the same expiration. The short put is bullish and has a lot of risk if the stock drops. The short call spread is bearish and has defined risk if the stock rises. The jade lizard is more bullish than it is bearish...but it’s not very bullish. The jade lizard doesn’t want the stock to drop, but it also doesn’t want it to rally too high.
For example, if a stock is trading at $10, a jade lizard could be short the $8 put and short the $11/$12 call vertical. If the stock drops below $8 or rises above $11, the jade lizard could lose money. That’s why the jade lizard is bullish, but not aggressively so. The best way to think about a jade lizard is that it’s a bullish short OTM put whose risk is reduced by selling an OTM call spread. In exchange for reducing the short put’s risk, the jade lizard gives up the potential profit if the stock’s price increases dramatically.
The two-part series of Market Measures focusing on jade lizards provides additional details on conditions that can be most optimal for this structure. One key takeaway from the show is that jade lizards appear more attractive when one can collect a credit from the entire trade that is larger than the difference between the two strikes involved in the vertical call spread. This structure essentially removes the upside risk completely, because you have received the maximum value of the vertical spread.
Going back to our previous example, if a stock is trading $10 and you sell the $8 put for $0.40 and the $11/$12 call spread for $0.60, then your total credit is $1 - which is equal to the difference between the strikes of the call spread ($12-11).
If the underlying rises to any value greater than $12, your worst outcome on the trade is to break even (not including execution costs). This is due to the fact that the maximum value of the $11/$12 call spread is a dollar, and you have already received a full dollar credit for the jade lizard.
If the stock goes anywhere above $12, the total loss in the call spread is offset by the total credit from the put and the call spread.
It’s important to keep in mind that the risks of a jade lizard are much greater to the downside. In the aforementioned example, this structure will be vulnerable to losses (possibly significant) if the underlying stock drops below $7.
For the best possible understanding of this trade, we suggest you review both episodes of Market Measures in their entirety when your schedule allows:
If you have additional questions on jade lizards, we hope you'll reach out at firstname.lastname@example.org.
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.
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