The Ultimate Guide To Trading The Jade Lizard

Do you want an Options trading strategy that has a 90% win rate and has absolutely no risk to one side?

Then you want to trade the Jade Lizard.

The Jade Lizard is a fancy name that is coined by the folks at TastyTrade.

But it has absolutely nothing to do with a lizard or any jade of any kind.

Instead, it’s a premium-selling, high-probability, and highly profitable Options trading strategy.

In fact, there are quite a number of traders that use the Jade Lizard as their bread-and-butter trading strategy.

And if you want to generate consistent income and profits trading Options, then you certainly want to master trading the Jade Lizard.

So what exactly is the Jade Lizard and how do you trade it?

The Jade Lizard Option Strategy

The Jade Lizard is a neutral Options trading strategy where it consists of two types of Options:

• Short Put
• Bear Call Spread (aka Short Call Spread or Call Credit Spread)

If you’re sharp enough to notice, if you replace the Short Put with a Bull Put Spread (aka Short Put Spread or Put Credit Spread), it would become the Iron Condor.

As you can see, all Option strategies are generally intertwined with each other.

Now, let’s break apart each of the two elements to get a better understanding of how the Jade Lizard works.

The Short Put

If you were to see the risk profile of the Short Put, it looks like this:

This Short Put is an undefined-risk strategy that is neutral-to-bullish.

The nature of the Short Put is that it has a fixed profit to the upside, but has an unlimited risk to the downside (all the way to zero).

As long as the market is above the Short Put strike price at expiration, you will get the full premium you sold it for.

But if the market is below the Short Put strike price at expiration, then your loss can be pretty significant.

However, you are compensated for the risk with a very high win rate if you choose your strike price around the one standard deviation move.

And you don’t have to worry about the market going to zero if you’re trading Index ETFs like SPY, QQQ, and IWM.

While it may look scary on this risk profile, the Short Put is actually a highly profitable strategy if you manage your risk properly (i.e. manage at 21 DTE and have proper capital allocation).

The Bear Call Spread

As for the Bear Call Spread, its risk profile looks like this:

The Bear Call Spread on the other hand is a defined-risk strategy that is neutral-to-bearish.

That means unlike the Short Put, it has a maximum cap on the loss.

If you break down the Bear Call Spread, it consists of:

• A Short Call
• A Long Call (to cap the maximum loss)

The maximum loss is capped to the width of the spread minus the credit received.

So for example, if you have a $5 width Bear Call Spread and you collected $1.50 in credit, that means your maximum risk would be $3.50.

That would equate to a maximum loss of $350 per spread.

Combining The Short Put & Bear Call Spread To Form The Jade Lizard

So if you combine the two Option strategies together, you get the Jade Lizard and its risk profile looks like this:

When you combine the two strategies, what you get is a neutral-to-bullish strategy with no upside risk!

That means even if the market shoots to the moon, you will still be in a slight profit.

But wait a minute…

You might be wondering how is it possible for the Jade Lizard to have no risk to the upside when the Bear Call Spread has risk to the upside.

Good question.

That’s because the total premium collected from both the Short Put and the Bear Call Spread is greater than the width of the Bear Call Spread.

If you recall what I mentioned about the maximum risk of the Bear Call Spread earlier…

The maximum risk is the width of the spread minus the credit received.

But what if the credit received is greater than the width of the spread?

That would mean that there would be no risk to the spread!

But how is it possible to collect a credit that is greater than the width of the spread when the credit of the Bear Call Spread is always smaller than the width?

It’s possible if you include the credit collected from the Short Put.

So for example, if you collected $2.50 on the Short Put and $1 on the Bear Call Spread, and the width of the Bear Call Spread is $3…

Then not only is there no risk to the upside, but you would also still make $0.50 if the market settled above the Bear Call Spread at expiration.

That would mean a $50 profit on the Jade Lizard as a whole.

That is why the Jade Lizard has such a high win rate because there is no risk to the upside.

Jade Lizard Takes Advantage of Skew

And the beauty of the Jade Lizard strategy is that it takes advantage of the skew in most equities (especially Index ETFs).

Particularly the Index ETFs, there is what’s called Put skew.

That means the Options at the lower strike are trading at higher volatility compared to the higher strikes.

And when an Option has higher volatility, its premium is higher.

With the Jade Lizard, you will be selling two Options at a lower strike price, and one Option at a higher strike price.

Let’s take for example a Jade Lizard construct of the following:

• Short Put strike at 380.
• Short Call strike at 427.
• Long Call strike at 430.

Both the Short strikes will be trading at a higher premium because of the skew compare to the Long Call strike.

This way, you’re ensuring that you’re selling the expensive premiums, and you’re buying the cheaper premium!

How To Trade The Jade Lizard

So how do you trade the Jade Lizard?

Here’s a guideline on the mechanics of constructing the Jade Lizard:

• Choose the 40 – 60 DTE Options.
• Short Put strike price around the 15 – 25 deltas. We want the premium received to be around 70% of the total premium collected.
• Short Call strike price of the Bear Call Spread to be around 30 – 35 deltas. We want the premium received to be around 30% of the total premium collected.
• Trade Management:
  • Method 1: Take profit at 50% of the premium collected.
  • Method 2: Close trade at 21 DTE, regardless if it’s a win or a loss.

Jade Lizard Trade Example

Here’s a trade example of a Jade Lizard I did on IWM (Russell 2000 Index ETF).

On 23rd September, I saw that the market was going sideways and decided to sell two Jade Lizards with the strike price of 200/231/233 for $2.12 each.

That means the total premium collected for this trade was $414.

After placing the trade, IWM continued sideways.

On 8th October, I closed the trade out for roughly 50% profit.

In just around sixteen days, I was able to get out of the trade for a nice total profit of $214.

So that’s pretty much how you trade the Jade Lizard!