Jade Lizard

Jade lizard is a popular strategy yet not so very known among traders. It is because of the name which sounds like historical artifact but actually was coined by former CBOE floor traders, Liz Dierking and Jenny Andrews, on the Liz & Jny Show on the Tastytrade Network.

It is a slightly bullish strategy but having no upside risk if we make sure the total premium collected OTM Put is more than the width of OTM Vertical Call Spread to have no upside loss.

Setup:

• Sell OTM Put
• Sell OTM Vertical Call Spread

Ideal IV Environment: High

Maximum Profit: The net premium we will receive here while opening the trade.

Max Loss: No loss on the upside. Unlimited loss in the downside.

How to Calculate Breakeven(s):

• Downside: Strike Price of short put – credit received
• Upside: None (If the setup is done correctly)

Example:

Here goes an example – https://unofficed.com/options-calculator/?save_id=5dde5918d9e66365547725

• Short 1580CE at 43.9.
• Long 1600CE at 35.
• Short 1500PE at 12.8.

Here the premium collected by OTM put i.e. 12.8 is more than the width of OTM Vertical Call Spread i.e. 43.9-35=8.9. Hence, no loss in upside!

An alternative way to view the setup is – Sell Strangle + Buy OTM Call. 

When do we do Jade Lizards?

To get proper scenario in this case, We need to find an instrument in which there is an asymmetry in the implied volatility in the options.- 

• Implied Volatility of OTM puts are higher than the ATM puts. 
• Implied Volatility of OTM calls are lower than the near OTM calls. 

In short, We are selling volatility that is rich (in terms of put options) and purchasing volatility that is less expensive (in terms of call options).