Ultimate Guide to the Jade Lizard Options Strategy

Taking a deeper dive at the background of the jade lizard strategy

Apr 11, 2022 at 12:38 PM
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    The jade lizard options strategy, invented by the original Lizard Trader, is a risk-defined, bull put credit spread. Using a spread of options with different strike prices but the same expiration date, the trader benefits from movement in the underlying asset price but does not have to worry about the direction or magnitude of that movement.

    The strategy uses one put option with a higher strike price and two put options with a lower strike price. The three puts have the same expiration date. The net cost of this position is equal to the difference between the sold strikes minus the width of the call spread. The maximum profit potential is limited to this initial debit, while the full loss potential is zero. This strategy has no upside risk, meaning that you cannot lose more than your initial investment in this trade regardless of how high the stock moves.

    This guide will discuss the Jade Lizard options strategy and how it can create profits and potentially provide safety for your account.

    What Is The Jade Lizard Options Strategy?

    The Jade Lizard Options Strategy is an options trading strategy designed to profit from a moderate rise or fall in the underlying asset's price with reduced risk compared to another neutral strategy. It combines two vertical spreads and can be created using all-call options or all-put options.

    It works best when you have moderate bullish or neutral expectations about the security's price movements but are unsure of its direction. It can also be used when you have a neutral outlook on the market but expect relatively large price swings in a specific stock.

    A trader can use the Jade Lizard Options Strategy for underlying securities, including stocks, exchange-traded funds (ETFs), and indices. The strategy profits when the underlying stock rises or falls beyond certain levels while limiting maximum losses to the cost of creating the strategy (the net premium paid).

    A Jade Lizard is a combination of two vertical spreads, and each of these spreads contains the same number of call and put options. One spread has an extended option at the middle strike price, while the other spread has a short option at the middle strike price.

    The Jade Lizard Options Strategy mostly profits from time decay, which occurs as the expiration date approaches. This strategy is also known as an "iron condor" with a twist, and A trader can use it to take advantage of market volatility. As the name indicates, this strategy involves opening multiple positions at different strike prices, giving rise to four other breakeven points.

    Advantages Of The Jade Lizard Options Strategy

    The jade lizard is one of the most popular options trading strategies, and it is an excellent choice for anyone interested in options trading. It is, however, more suitable for those who are familiar with options trading and have at least some essential experience in this field because it is not that easy to learn. The initial profit potential is the first advantage of a jade lizard. It is one of the key reasons behind its immense popularity among traders.

    The second advantage is that it can be used in bullish and bearish markets, irrespective of the volatility. This makes it possible for traders to use this strategy when trading stocks, forex, and other underlying assets.

    The third advantage is that it can be closed before expiration. The trade will also not be entirely lost if the call options expire out of the money. Traders can close the put spread along with the trading costs and still earn a profit.

    The fourth advantage of this trading strategy is that no commissions are paid for the buy or sell side. Instead, there are only commissions on the expiring options so that traders can keep much of their profits.

    The fifth advantage is that traders get to utilize leverage in this trade. Of course, A trader can minimize the leverage by trading fewer contracts or even one contract. Still, traders should be aware of the risk involved in this strategy because high leverage always increases the potential for losses.

    When Should I Utilize The Jade Lizard Options Strategy?

    The jade lizard strategy is a type of options strategy created by combining a bear call spread and a bull put spread. But the difference with other strategies is that the call spread is placed further away from the money than the put spread.

    The strategy was introduced by Steve Lentz, Managing Director of The Options Industry Council (OIC), in 2006. If you want to try this advanced option strategy, the steps are required to implement it.

    Step 1: This step requires you to choose a stock showing bullish signs and will not move in a very volatile manner. There are several ways to determine the relative price and volatility. You may use strategies such as the "Covered Call" or "Bull Put Spread" to determine the same.

    Step 2: The ideal way to go about this would be to buy an In-the-Money (ITM) Call Option and sell an Out-of-the-Money (OTM) Put Option. The difference between their strike prices determines your net debit, that is, the maximum amount of money you can lose from this transaction. Then, based on the risk tolerance of your portfolio and investment goals, you can decide on an optimal range for yourself.

    Step 3: Once you exercise the buy-on-close and sell-on-open strategy, there are two ways to close the trade. The first is to let it expire worthless. The other is to take a loss by selling the call options early, which you may want to do if you are concerned about the stock rises above the strike price.

    Step 4: Calculate your profit or loss from exercising your option position at expiration. In this case, we will use an example where our call options expire in the money by $0.50 and our put options expire out of the money by $0.50.

    Conclusion

    Against this backdrop, the jade lizard is all the riskier because it lowers your breakeven points in both directions, increasing the risk of incurring losses. The only saving grace is that the risk involved in this strategy is limited and capped at entry, making it relatively safer than other strategies like the iron condor or the butterfly spread.

     




     
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