How to Use a Jade Lizard Options Strategy to Trade the New Bitcoin ETF
Several months ago, I introduced an options strategy known as the jade lizard. Since then, I’ve received numerous requests to post more examples of how I trade the jade lizard strategy.
Back in mid-September I posted an example using jade lizard options strategy on the Amplify Blockchain ETF (BLOK).
Today, I’m going to over another example of how I might approach a potential trade using a jade lizard options strategy.
Jade Lizard Options Strategy – Quick Primer
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 in slightly lower markets as well.
This trade works best on lower-priced stocks (less than $60) that have a high implied volatility.
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)
For example, if the strikes of your bear call spread are $2 wide, we would want to collect at least $2 in premium from our short put and bear call spread. Any premium less than the width of our chosen bear call spread and the jade lizard strategy will not be as effective.
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 a 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 implied volatility 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 good candidate, ProShares Bitcoin Strategy (BITO). It’s currently trading for 41 a share.
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 December 17, 2021 expiration cycle with 44 days until expiration. As you can see from the vertical bar highlighted in a peach color, the expected range or move is from roughly 31 to 49.
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 1-strike-wide bear call spread, so we need to look for a put that totals roughly 70% of the $1.00, or roughly $0.70.
Taking that into account, let’s choose the 31 put strike selling for roughly $1.10
We can bring in roughly $1.10, which covers 100% of our 1-strike-wide bear call spread.
In this example, the probability of success on the downside is 76.19%. My preference is to be above 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.
Since we can bring in $1.10 worth of premium from selling the 31 put, we don’t need to look towards a bear call spread to bring in the remaining premium to cover the $1 width of our bear call spread. Remember, in most cases, the put we select will cover 70% of our strike width, or $0.70 of the 1-strike-wide bear call spread. So, we will need to cover the remainder of our 1-strike-wide bear call spread. But not in this example. We are free to choose a bear call spread at the probability of our choice, knowing our upside is free of risk. However, probabilities should still remain a factor in our selection.
If we look at the 46/47 bear call spread, we can bring in roughly $0.25 worth of premium. Our probability of success on the upside is 71.98%, but remember, in total, between selling the put and bear call spread we are able to bring in $1.35 ($1.10 + $0.25). So, our upside has no risk whatsoever. BITO can move $10 higher, and we will not experience any upside risk.
Best-case scenario is if BITO closes at expiration between the 31 put strike and 46 calls strike. If so, we would receive a max profit on the trade. However, in most cases, I will take off the trade when I can lock in 50% to 75% of the original premium sold.
How to Manage Risk When Using a Jade Lizard Options Strategy
If BITO 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 BITO 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 BITO shares, in this case for 31, or simply close out the trade. Just remember, we have brought in $1.35 worth of premium, so our downside risk is 29.65 (31 put strike – $1.35 premium). As a result, we would be issued shares of BITO for 27.7% less than the current price of BITO, or 41.
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 trade example that would be $0.65 to $0.30
Trade Summary for ProShares Blockchain ETF (BITO)
Directional Assumption is neutral to bullish.
- Trade Setup: Sell OTM put
Sell OTM bear call spread (short call vertical)
- Trade: Sell to open 31 put for $1.10
Sell to open 46/47 bear call spread for $0.25
Total credit or premium = $1.30
- Max Profit: Credit received from trade, or $130 per jade lizard. Max profit occurs when the security, in this case BITO, closes between the short put strike and short call strike at options expiration.
- Breakeven: strike price of short put – premium or credit received (31 – $1.35) = 29.65
- 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 toolbelt.
As always, if you have any questions, please feel free to email me.