Trading Stock Options The Jade Lizard
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The Jade Lizard Options Strategy | The Beginners Guide

At first, I thought this was because the strategy wasn’t good. In time though, I realized that my emotions and views of the market played a larger role in my successes or failures than the actual strategy did.

New Options Traders Start Here

If you are new to trading options check out my posts on Cash Secured Puts and Covered Calls. These are great beginner strategies and together make up the Wheel Strategy. Once you have traded “The Wheel” for a while the Jade Lizard is a great intermediate trade for you to try, so keep reading!

Trading Stock Options - Definitions

Before continuing on I wanted to review some options trading vocabulary.

Strike Price: The predetermined price at which you are willing to buy or sell your shares 

OTM: Out of the money 

ITM: In the money

DTE: Days to expiration

Short Strangle: Selling a short OTM call option and a short OTM put to expire on the same day.

Example: Stock ABC trading at $100. Short the $110 Call and the $90 Put with 30 DTE.

Don't stocks only go up?

The belief that the market only goes up has hindered my ability to stay in a trade long enough to let the trade be profitable. Many times when I entered a long position (betting a stock goes up) the trade would go against me immediately and I could sit on that trade for months waiting for the stock to go up.

In my heart knowing if I just waited long enough eventually I would be right. This would allow me to collect a lot of premium and eventually close out the trade for a profit.

 

The Mentality of trading stocks and options

The problem comes when I would enter a short position (betting a stock will go down) and essentially the same thing would happen to me. The price of the underlying stock would continue higher causing me to lose money, but unlike with the long position I could never stay in the position long enough. I would exit the position at “max pain” and lose money. 

Now, why can I sit in a long position for months but not do the same for a short position? A long position indeed has a limit to the amount you can lose. If you buy 1 share of Stock ABC for $100 and it goes to $0, the most you can lose is $100.

If you short that same Stock ABC at $100 and the stock continues to go up there is an unlimited amount of loss. That stock theoretically could go to $10,000 and you would be down $9,900.

This makes shorting so difficult and is why I have trouble holding on to strangles long enough to be profitable. Once my short Call option went “in the money” I would have to exit the trade for a loss due to fear of unlimited loss.

What is a Jade Lizard?

This is when I discovered the Jade Lizard option strategy. This strategy may not be as flexible as the strangle, but it works better for me mentally, allowing me to stay in trades longer and hopefully make more money! The jade lizard is neutral to a slightly bullish strategy, this means that you will make money with the passage of time as the underlying stock price stays stable or goes up slightly.

You can also fashion this trade to have no upside risk, this will increase your probability of a small profit but decrease your probability of your options expiring completely worthless, but you take half the risk out of the trade. Let’s go over the setup of this trade.

How do I set up a Jade Lizard Strategy?

Let’s take a look at how you set up a jade lizard option strategy. At fist it may seem confusing, but we will break it into 2 parts.

A short OTM put

Your jade lizard strategy will depend on your overall market assumption. Choosing your strike prices will depend on you having a bullish or neutral outlook. The higher strike price you choose for your call options the more bullish your position will be.

This strategy is very similar to a short strangle, you first start with a short OTM put option, I prefer to be somewhere between the 30 and 40 delta. This is a strategy I prefer to do on stocks that I am bullish on over the long term. Beware if the price of the underlying stock drops significantly you could be the proud owner of 100 shares at a price you no longer like. 

A short OTM call credit spread

Now on the call side, you are going to want to get an OTM short call credit spread. First, you need to sell an OTM call option. For this I prefer between the 20-30 delta, depending on market volatility and the credit you are receiving. If the 20 delta is giving you less than $0.50 often I will come in closer to get more of a credit.

The price of the option will depend on market volatility and how far out of the money the call or put options are. High implied volatility means more risk, but also means a higher net credit for your jade lizard position.

So now we have a slightly bullish short strangle set up, and for the last part we are going to buy a further OTM call. Now how far out you buy the call depends on how bullish you are.

If you are afraid that the stock may shoot way past your short call, then buying a long call closer to your short call will allow you to reduce your total loss, or even better allow you to still come away with a profit. 

Calculating the risk of your Jade Lizard Options Strategy

To calculate your risk on the high side of this trade is pretty easy. You first must find the total credit received for selling your put and the credit received for selling you short call and subtracting the cost of purchasing the long call.

Once you have the total credit received you then subtract that credit from the width of your short and long call options. This is confusing to put down in words so let’s look at an example. Let’s look at the stock ETSY trading at about $110.50 in the example below.

You sold the $100 short put for a credit of $4.50

You sold the $130 short call for a credit of $2.70

You bought the $135 long call for a debit of $1.80

4.50 + 2.70 – 1.80 = $5.40

5.40 – (135-130) = $0.40

So for this trade the most you can make is $5.40 or $540 if the options expire worthless (the stock stays between $100 and $130 in 42 days. If the stock goes above $130 and stays there, you will make $0.40 or $40. So with this trade you have completely eliminated your upside risk. It won’t be a huge profit for you if you hold until expiration, but compared to a short strangle you will be much better off.

Managing breakeven points on your jade lizard options strategy

The key to the jade lizard is managing this trade early if it crosses your breakeven point on the high side. Once your call credit spread goes ITM, you wont be able to roll out in time for a net premium credit.

Exiting your jade lizard strategy

When it comes to an exit strategy, it is very unlikely you will ever hold onto a jade lizard until expiration. If the stock trades higher than your call options breakeven point, then it is best to just exit the trade. If the stock stays between your breakeven points, Tastyworks suggests exiting your position once you make 50% of max profit or manage around 21 DTE.

Is there any downside to trading Jade Lizard Options

Though there are many upsides to his trade, it has its downsides as well! The biggest and easiest one to see is that if the stock falls below your short put and stays there you are going to have a pretty large loss.

It is acceptable of course to continue to roll out in time and continue to collect credit until the stock finally bounces back, or can accept the assignment of the 100 shares by allowing the options to expire ITM.

You can then either sell the shares for a loss or my suggestion is to do the wheel strategy by selling calls against your 100 shares. You can do this to collect premium and eventually sell the shares when your call is exercised by expiring ITM.

The other downside to this strategy comes when your call side goes ITM. If the price of the stock you are trading goes far above your vertical call spread, it is highly unlikely you will be able to roll your Jade Lizard for any additional credit. If your Jade Lizard Strategy is set up with no risk to the upside, this is no big deal, but if you didn’t, you may be forced to take a loss.

This isn’t a huge downside, but it is a good thing to realize when you are setting up your initial trade entry. When you have a defined risk trade, like the Jade Lizard is to the upside, there are usually very few adjustments you can make when your trade gets tested.

Some thoughts I have on the Jade Lizard

The main thing I like to stress with a trade like the Jade Lizard is to focus on stocks you would actually like to own. If 2022 taught us anything, it is that the market goes not only up… sometimes it only goes down!

I stopped trading high-flying stocks and now focus on high-quality companies. Now, these stock options rarely offer you the “juicy” premium some meme stocks offer, but they also allow you to sleep at night if you are trading during a bear market.

The wheel strategy

The Jade Lizard is a great supplemental strategy to The Wheel trading strategy. I use both in conjunction with each other. Instead of selling a Cash Secured Put alone, I will instead sell a Jade Lizard to pull in more premium.

This isn’t as successful when the market moves in one direction but has a real advantage in a stock market that can’t find a direction. 

Open an account to trade a Jade Lizard Options Strategy

To trade the Jade Lizard open an account with Tastyworks. I have been personally using them for 5 years and believe they provide a superior product to most other options trading brokers. All the images used for this post are from Tastyworks and their options analysis makes understanding options so much easier.

By clicking on the link above and opening an account with Tastyworks you are supporting this blog! I appreciate everyone who supports the blog by either commenting or clicking on affiliate links. Thankyou very much!

Conclusion

Conclusion paragraph: The jade lizard is a great strategy for those looking to make money from theta decay as well as market movement. I suggest starting with the wheel strategy and then graduating to the jade lizard if you are feeling confident. Trading the stock market can be mentally challenging, that is why choosing a strategy that matches your style is important. Make sure you are comfortable with the strategies before putting any money on the line. Are you ready to start trading? Open an account with Tastyworks and get started today!

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