Directional Assumption
Neutral to Bullish
A Jade lizard is a variant of a credit spread with an added put to give us no upside risk. It gives us a faily high probability of profit. they are set up to take advantage of volatility skew.
This can also be viewed as a variant of a short strangle or short straddle with an added out of the money long call to give us no upside risk.
The key of profitability is making sure the total credit received is greater than the width of the credit spread which should be a dollar or greater.
When to Run It
I am anticipating that the price of the underlying stock stays between the short put and short call for maximum profit or a profit if the price continues to go up.
Setup
- – Sell OTM Short Put with at least 70% Credit
- – Sell OTM Call Spread with at least 30% Credit
- or… simply sell a Strangle or straddle and buy an OTM call.
NOTE: All options have the same expiration month.
Timeline
30-45 days
Ideal Implied Volatility
** 50% or greater**
Profit Target
If my position shows a profit near 50% of the max potential gain, I will close the position early to lock in profits.
Time Decay
As time goes by theta works in my favor as I collect premium as long as the price stays above the short put strike price.
Maximum Profit
Maximum profit is realized when the stock price is between the short strikes at expiration.
Maximum Loss
This is a defined risk trade.
Downside: Strike Price of short put – credit received
When set up correctly, we have no risk to the upside.
Risk Management
This trade can be 1-2% of my account.
Tips
You want at least 30 cents on the call spread and 70 cents on the short put.
When set up correctly there will be no upside risk and the total credit received is the width of the call spread or greater.
-We can use this strategy around earnings
If the trade moves to the call side without breaching I can close the trade for a gain.
If the stock sells off and tests the short put with greater than 21 DTE then I can roll down the call spread to collect more credit without upside risk. If less than 21 DTE then I can roll the put out in time and reestablish a new call spread.
In the worst-case scenario, a trader can close the entire position for a loss if the loss on the short put becomes too large.
