A Jade Lizard is a slightly bullish strategy that combines a short put and a short call spread. The strategy is created to have no upside risk, which is done by collecting a total credit greater than the width of the short call spread.
Directional Assumption: Neutral / Bullish
- Sell OTM Put
- Sell OTM Vertical Call Spread
Ideal Implied Volatility Environment : High
Max Profit: Credit received from opening trade. Max profit is realized when the stock price is between the short strikes at expiration.
How to Calculate Breakeven(s):
- Downside: Strike Price of short put - credit received
When set up correctly, we have no risk to the upside.
A Jade Lizard is traded when a trader has a neutral to bullish assumption on a stock, but not extremely bullish since the position incorporates a short call spread.
The trade is suitable for stocks that have sold off and have high implied volatility rank (IVR). This allows for more premium to be collected, while having no upside risk if the underlying trades through the short call spread.
For traders who are very bullish on a stock that has sold off and has a high IVR, strategies such as short puts or covered calls may be more suitable.
When do we close Jade Lizards?
The trade is closed for a winner by purchasing the options back for a net debit that is less than the credit collected at order entry. The first profit target is 50% of max profit, or half of the credit that was initially received at order entry.
When do we manage Jade Lizards?
If the stock trades through the short call spread, the short put can be rolled up to collect more credit. However, since there is no upside risk when trading Jade Lizards, this adjustment isn’t entirely necessary.
If the stock sells off and tests the short put, the short call spread can be rolled down to collect more credit without increasing the upside risk.
In the worst case scenario, a trader can close the entire position for a loss if the loss on the short put becomes too large.
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