I’ve been using traditional iron condors for years. And there is no doubt that iron condors are one of my favorite strategies. But, when the opportunity presents itself, I favor a strategy similar to an iron condor, but with a slight twist…the jade lizard options strategy.
Weird name, I know, but it seems almost all options strategies have strange names. Nonetheless, the jade lizard is an incredible, defined-risk strategy that offers investors the opportunity to take advantage of high implied volatility environments.
In fact, when used correctly, the strategy offers no risk to the upside … that’s right, absolutely no risk to the upside. But before we get to that aspect, let’s go over the basics of the strategy.
A jade lizard consists of a short put and a short call vertical spread (bear call spread) with limited maximum profit potential, and no risk to the upside. The strategy has a neutral to bullish market assumption but can also make money on slightly lower markets as well.
The credit that is created is higher than the width of the bear call spread.
The trade set up for a jade lizard options strategy is as follows:
- Sell an out-of-the-money put
- Sell an out-of-the-money bear call spread (short call vertical spread)
However, the above doesn’t get into the necessary details. The key is to create a credit from the short put and bear call spread that is greater than the overall width of our bear call spread.
For this to occur, in most cases, my goal is to bring in roughly 70% of the overall credit from my short put, which means 30% of my credit must come from the bear call spread. Now, of course, the percentages are approximations, but remember, the goal is to bring in an overall credit that is greater than the strike width of our bear call spread. By doing so, we eliminate all risk to the upside
Jade Lizard Strategy – Step-By-Step
Remember, this is neutral to bullish strategy, so that should be our leaning going into the trade.
The first item is to look for an underlying stock that has a high IV rank and IV percentile. Implied volatility (IV) is one of the key components to any options pricing model, so when IV is high, we have the opportunity to bring in more premium.
After doing a quick screen (I’ll show you how to set up a similar screen in a follow up video) on stocks with a mid-to-high IV rank, I found a decent candidate, Intel (INTC). Just remember, we are simply going through the mechanics of a jade lizard, so if the trade doesn’t meet your expectations, no worries, at least you will know how to implement the trade when an opportunity arises.
The next step is to take a look at the expected move of the expiration cycles ranging from 30 to 60 days.
Below is the August 20, 2021 expiration cycle with 32 days until expiration. As you can see from the vertical bar highlighted in yellow, the expected range or move is from roughly 50 to 58.50.
Ideally, we want to place our jade lizard outside of the range. But, the most important aspect is to keep our probabilities as high as we can while making sure the amount of credit we bring in exceeds the width of our bear call spread.
Let’s start by taking a look at the put side of things.
I plan on going with a 2-strike-wide bear call spread, so we need to look for a put that totals roughly 70% of the $2.00, or roughly $1.40.
So, taking that into account, we can choose either the 52 strike or 52.5 strike.
Let’s go with the 52.5 strike. We can bring in roughly $1.56, which covers 78% of our 2-strike-wide bear call spread.
In this example, the probability of success on the downside is 60.81%. My preference is to be closer to one standard deviation out, or approximately 68%.
Quick note: If I’m not pleased with my probabilities, at any time I can move on to another potential trade, possibly looking for an underlying stock that has a higher implied volatility.
Now that we know we can bring in $1.56 worth of premium from selling the 52.5 put, we can look towards the bear call spread to bring in the remaining premium, or $0.44. Again, this will meet our requirement of bringing in enough premium to cover our 2-strike-wide bear call spread.
If we look at the 57.5/59.5 bear call spread, we can bring in roughly $0.45 worth of premium. Our probability of success on the upside is 60.74%, but remember, in total, between selling the put and bear call spread we are able to bring in $2.01 ($1.56 + $0.45). So, our upside has no risk, whatsoever. INTC can move $20 higher, and we will not experience any risk.
How to Manage Risk When Using a Jade Lizard Options Strategy
If INTC does move higher and through our bear call spread, even though we have no risk to the upside, we can roll up our put strike and bring in additional premium, thereby giving us a greater return on the trade.
If INTC pushes lower, we can roll down the bear call spread to bring in more premium.
Worst case, scenario is that we can allow ourselves to be put INTC stock, in this case for 52.5, or simply close out the trade. Just remember, we have brought in $2.01 worth of premium, so our downside risk is 50.49 (52.5 put strike – $2.01 premium).
I manage winning trades by taking off the trade when I can take off 50% to 75% of the premium that I brought in. In our example that would be $1.00 to $1.50.
Trade Summary for Intel (INTC)
Directional Assumption is neutral to bullish.
- Trade Setup: Sell OTM put
Sell OTM bear call spread (short call vertical)
- Trade: Sell to open 52.5 put for $1.56
Sell to open 57.5/59.5 bear call spread for $0.45
Total credit or premium = $2.01
- Max Profit: Credit received from trade or $201. Max profit occurs when the stock, in this case INTC, closes between the short put strike and short call strike at options expiration.
- Breakeven: strike price of short put – premium or credit received (52.5 – $2.01) = 50.49
- No risk to the upside.
The jade lizard is a great alternative to an iron condor and is a worthwhile strategy to add to your options strategy toolbelt.
As always, if you have any questions, please feel free to email me.