Jade Lizard Options Strategy Explained (Real Examples)

If you're looking for a relatively little-known strategy to benefit in a neutral to bullish market, the Jade Lizard options strategy might be your key. This technique cleverly combines selling a short put with a short call spread, aiming to remove upward risk. This short guide will look into the jade lizard options strategy, from what is it to how to use it.

Key takeaways

• The Jade Lizard options strategy is ideal for neutral to bullish market conditions. It combines selling a short put with a short call spread to maximize premium collection.
• The maximum profit of the Jade Lizard strategy occurs when the stock price is between the short strikes at expiration. The maximum loss will occur below the naked put option price.

What is the Jade Lizard Strategy in Option Trading?

The Jade Lizard options strategy is a way to trade options that combines selling an out-of-the-money (OTM) put with a call spread. This method is specifically designed for those who seek a balance between risk and reward, offering a unique advantage of no upside risk. How does this happen? Traders will need to do the following:

1. Sell a put option at a lower strike price (OTM), corresponding to point A in the image below
2. Sell a call spread (consisting of a sold call option at a higher strike price - point B below - and a bought call option at an even higher strike price - point C below).

Usually, you try to build this so that the premium collected is higher than the call spread's max loss.

Here is what the strategy will look like on SPY (currently trading around $520, so we sell a $510 put, a $535 call, and we buy a $545 call):

This action allows traders to collect premiums from both the naked put and the call spread, leading to a net credit situation. This net credit represents the maximum profit achievable with this strategy.

Remember: your goal here is the premium collection. Traders should consider the opportunity to earn income from two different legs while managing risk effectively (as we’ll explain later, the risk for uncapped losses is something you can’t rule out).

Since the strategy combines elements that benefit from market stability or slight bullish trends, it is an excellent choice for those with a neutral to slightly bullish outlook on a stock.

Moreover, the way the Jade Lizard options strategy is built to appeal to traders who prioritize upward risk management. Given that the strategy inherently limits upside risk by its design, investors can rely on this strategy in various cases, such as trading solid stocks, or building long-term (i.e., with maturity dates far in time) trades.

The Jade Lizard options strategy offers a practical path for traders aiming to remove upside risk in those cases in which you are fairly confident that the market won’t enter a bearish trend.

When is a Jade Lizard Strategy a Good Idea?

If we look at the pros and cons of the jade lizard strategy, we can quickly understand when it is a good idea to use it (and when it isn’t).

Jade Lizard - Pros

• Particularly effective for when you have a neutral to bullish outlook on a stock.
• High implied volatility rank translates to more premium to collect.
• Limited upside risk if the stock price surges past the short call spread.
• Suitable for cautious optimists in range-bound markets.
• Can serve as an income-generating tool in sideways-moving markets.

Jade Lizard - Cons

• Unlimited risk to the downside.
• Not suitable for extremely bullish outlooks due to capped upside potential.
• Alternative strategies may be more appropriate for very bullish stances on stocks with high implied volatility.
• Requires understanding of market behavior, particularly in range-bound or sideways-moving markets.
• Timing of trade closure requires consideration to maximize profitability and adapt to market changes.

Should You Close Your Jade Lizard Trade Early?

When trading options, you should never disregard the possibility of closing your position early. This is especially true for credit strategies where your profit is limited, and this is also true for the jade lizard options strategy.

Whether to lock in profits or minimize losses, understanding when to exit is key. The decision is primarily influenced by market conditions and your individual strategy goals. For instance, if you’ve reached 50% of the maximum profit sooner than expected, buying back the options for a net debit less than the initial credit can be a smart move. This step would ensure you secure gains before any market reversal.

Active trade management is crucial in responding to unexpected market movements. If the stock price pushes through the short call spread, there’s an opportunity to roll up the short put for additional credit.

Given there’s no upside risk with the jade lizard, this adjustment enhances your position without added risk. Conversely, if the stock drops and tests the short put, rolling down the short call spread to collect more credit can help mitigate losses without increasing your exposure to upside risk.

However, not all scenarios are recoverable. If losses on the short put escalate, sometimes the best course of action is to close the entire position. This move prevents further financial drain, underscoring the importance of knowing when to cut losses (it goes without saying that you should always try to avoid the case in which your broker closes your position due to insufficient margin).

What we are saying is that the jade lizard options strategy requires a balance between strategic patience and decisive action. Keep following the market, day after day, and act in case you need to protect profits or minimize a loss. Always keep in mind that, if you expect the market to move lower, the jade lizard is not the right choice and you'll want to explore several bearish option strategies.

The Potential Outcomes of the Jade Lizard Strategy

Let’s walk through a real-world Jade Lizard strategy example using NVDA, one of the most actively traded tickers in the market. At the time of this setup, NVDA is trading around $131. With the help of our custom scan feature (which allows you to scan the market for trades like this one in a unique way) you can uncover setups like this in seconds on our options screener.

Here’s how the trade is structured:

• Sell 1 $124 put
• Sell 1 $139 call
• Buy 1 $142 call

The P&L chart of your Jade Lizard will look like this:

This Jade Lizard has a maximum profit just above $500, and most importantly, no risk to the upside. This is made clear by the flat line on the right-hand side of the P&L chart, confirming that NVDA can move well above $142 without putting the trade at risk.

Here’s how the outcomes break down:

Scenario 1: NVDA closes below $124

This is where the risk lies. If NVDA drops below the lower breakeven ($119.05), the position starts to lose money. The lower it goes, the bigger the loss.

Scenario 2: NVDA closes between $124 and $139

This is the ideal outcome. If NVDA finishes within this range at expiration, you get to have the max profit (in this case, that’s just over $500).

Scenario 3: NVDA closes above $139

Even in this case, the trade holds up well. The loss on the short $139 call is offset by the long $142 call, and the put you sold is also there to help. This means any rally in NVDA beyond $139 does not impact the trade negatively. The profit remains the same as in the previous scenario, with no upside risk.

This structure is particularly appealing for traders with a neutral to slightly bullish view on a stock. And thanks to the custom scan feature we offer, you can consistently identify Jade Lizard setups like this, something you won’t find on most platforms.

If you’re new to the strategy, paper trading can be a great way to get familiar with the dynamics before putting real money to work.

Adding a Twist: The Reverse Jade Lizard Strategy

But what if you don't think a stock will move up, and you'd like to build something similar to a jade lizard strategy in a bearish/sideways market?

The reverse jade lizard is your go-to method. This strategy combines an out-of-the-money short call with an out-of-the-money bull put spread. Crafted correctly, the reverse jade lizard carries no downside risk, making it ideal for stocks that seem overbought and/or have high implied volatility.

Essentially, it flips the jade lizard options strategy on its head: while it eliminates the risk of losing money if the stock falls, the reverse jade lizard will come with the negative side of potentially unlimited losses if the stock unexpectedly surges.

Jade Lizard vs Iron Condor

The last question we want to answer here is how the jade lizard options strategy stacks up against the iron condor. Both strategies involve selling options to pocket premiums, and they lean towards a neutral to bullish market stance with defined risk and reward. In both, the idea is while you get premium from both calls and puts side, you can only lose in one of them.

However, the jade lizard combines a short put with a short call spread, eliminating upside risk. This aspect makes it especially appealing in neutral to bullish markets, allowing traders to maximize premium collection while being shielded from losses if the market climbs.

Instead, the iron condor strategy sells both a put spread and a call spread, capping losses but also limiting gains, making it ideal for range-bound markets. Its structure offers potentially lower margin requirements, making it a conservative choice for those wary of significant market shifts.

If the idea of a very high loss potential from the jade lizard trade scares you and you are looking for a less risky trade idea, maybe you'll want to see how we use the broken wing butterfly option strategy.

You will go for an iron condor when you anticipate a relatively sideways market (even though you can always set a very wide iron condor to allow for some movement on either side without pulling at your heartstrings). On the other hand, you'd be more likely to go with a jade lizard when you want to take advantage of neutral or even slightly bullish markets and think that the chances for a downward move are relatively low.