Jade Lizard Option Strategy – A Holy Grail for Option Traders?

Stock trading helps those involved quickly earn extra income over an hour, day, month, or even year. But that is only if they know their way around it.

In this respect, options trading is an asset you should be aware of. It is considered to be an investment avenue through which you can earn consistent gains with defined risks.

The Jade lizard option strategy falls under options trading. As fancy as the name sounds, it also serves to give back equally fancy results if appropriately implemented.

Read on to find out when and how to implement the jade lizard option strategy.

What Is The Jade Lizard Option Strategy?

The Jade lizard option is a custom strategy that constitutes a bear vertical call spread. An OTM PUT option is sold on top of vertical call spread to reduce the risks. It is a slightly bullish strategy.

In simple terms, this option strategy is constructed by buying a call option at one strike price, selling another call option at a lower strike price, then selling an OTM put option at a strike price lower than that of both call options. All the options sold or bought should belong to the same expiry date.

Jade Lizard Option Strategy

Reference: https://d1rwhvwstyk9gu.cloudfront.net/2018/06/Jade-Lizard-Diagram.jpg

One of the best things about the jade lizard option is that it takes undue advantage of the market volatility fluctuations. This allows you to bid over shorter call spreads that wouldn’t have been possible otherwise. 

As a result, you get premium credit, and it also paves the way to increase your potential profit based on price movements.

Also Read: Most Successful Options Strategies for Beginners

Twisted Sister – Reverse of Jade Lizard

Another interesting option strategy called “Twisted Sister” is exactly the opposite of the Jade lizard strategy.

This strategy constitutes a bull vertical call spread along with the sale of the OTM call option. The strategy involves selling a put option is sold at a particular strike price, another put option is bought at a lower strike price, and an OTM call option is sold at a strike price higher than that of both put options.

This is a slightly bearish strategy as opposite to Jade lizard.

Advantages Of The Jade Lizard Option

The most significant advantage of the jade lizard is that it brings in profits efficiently, smoothly, and quite fast. It is like a trump card for those who know how to implement it, and the cherry on the cake is that it minimizes risks associated with it.

Another advantage is that it comes with hedged option positions that are risk-free. It may, however, reduce the position’s maximum profit. But at the same it, it reduces risks associated with it in the long run, especially when underlying assets move unexpectedly.

When To Apply The Jade Lizard?

The jade lizard strategy will be an ideal one to implement when the market volatility skew becomes visible. 

Another time that you can apply this strategy is when the stocks get oversold. This will make the underlying assets either go up or stay where they were. But the catch is that there will be a crush in volatility that will fluctuate options prices.

How To Apply The Jade Lizard Option Strategy?

Here are things to set up for implementing a Jade lizard – 

  • First, you need to sell a put.
  • Next, we sell a call credit spread, making sure that our total credit received is greater than the width of the spread.
  • Then, we hope that the underlying spread has a move even smaller. The jade lizard makes a maximum profit if the underlying expires between the short put and the call of the spread.
  • As long as you collect a credit more significant than the width of the call spread, a large upside move won’t result in a loss.

Therefore, a jade lizard gives you the effect of selling a put at maximum profit. But at the same time, it also eliminates buying the most expensive option on the board.

Also Read: How To Pick The Best Stocks For Options Trading?

Endnotes

The jade lizard option strategy is very promising for sustainable returns. However, it can be a dangerous territory to dive into without proper knowledge. 

We have tried to cover all the crucial elements of the jade lizard and its implementation for your better understanding here. But we must caution that any strategy should be subject to personal experience and realistic analysis before being called a successful one.

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