One of our favorite strategies is the Jade Lizard, a neutral to bullish strategy which combines a short naked put and a short call spread to take advantage of downside volatility skew. This is because puts generally have more premium than Calls and Call Spreads are more expensive than Put Spreads. We ran a study to see how to use this strategy most effectively.
Using SPY (S&P 500 ETF) from 2005 to present, we sold the OTM put closest to a $1.50 credit and the closest OTM $2 wide call spread that collected a $0.50 credit (forming a Jade Lizard). We then compared holding these trades until expiration to managing them at 50% of max profit. The trades had no upside risk due to collecting a credit equal to the width of the call spread.
Watch this segment of “Market Measures” for the valuable takeaways and the data that indicates the best way to trade Jade Lizards based on historical results.
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