The Big Lizard is a powerful options strategy that takes the concept of the Jade Lizard and amplifies it. By using a short straddle instead of separate out-of-the-money options, you can collect significantly more premium while still protecting yourself from unlimited upside risk. This guide will teach you everything you need to know about this aggressive premium-selling strategy.
What is a Big Lizard?
A Big Lizard is a three-legged options strategy consisting of a short at-the-money straddle (selling both a call and put at the same strike) combined with a long out-of-the-money call for protection. The result is a position that collects substantial premium with defined risk to the upside but unlimited risk to the downside.
The Big Lizard advantage: You collect massive premium from the at-the-money straddle, and the long call protects you if the stock rallies hard. However, you must be prepared for the downside risk, which remains substantial.
Components of the Big Lizard
The strategy consists of three legs:
- Short at-the-money call: Sell a call at or near the current stock price
- Short at-the-money put: Sell a put at the same strike as the call
- Long out-of-the-money call: Buy a call at a higher strike for upside protection
Example Setup
Stock XYZ is trading at $100. You expect the stock to stay relatively flat.
- Sell the $100 call for $4.00
- Sell the $100 put for $4.00
- Buy the $110 call for $1.00
- Total credit: $7.00 ($700 per contract)
You have collected $700 in premium. Your maximum loss on the upside is the call spread width ($10) minus your credit ($7), which equals $3 or $300. Your downside risk extends to $93 (strike minus credit) before you start losing money.
Big Lizard vs Jade Lizard
While these strategies share a similar name and structure, they have key differences:
| Feature | Jade Lizard | Big Lizard |
|---|---|---|
| Short strikes | Out-of-the-money | At-the-money |
| Premium collected | Moderate | High |
| Profit zone | Wide | Narrow (but deeper) |
| Risk profile | More forgiving | More aggressive |
Profit and Loss Analysis
Maximum Profit
Maximum profit occurs when the stock closes exactly at your short strikes at expiration. In our example:
- Stock at $100 at expiration
- All options expire worthless
- You keep the full $700 credit
Upside Breakeven and Risk
On the upside, your risk is capped by the long call:
- Breakeven: $100 + $7.00 = $107
- Maximum loss: $10 (spread width) - $7.00 (credit) = $3.00 or $300
- This occurs when the stock is at or above $110 at expiration
Downside Breakeven and Risk
On the downside, risk is substantial:
- Breakeven: $100 - $7.00 = $93
- Maximum loss: Theoretically unlimited (stock can go to zero)
- At $90: Loss = $10 - $7 credit = $3.00 or $300
- At $80: Loss = $20 - $7 credit = $13.00 or $1,300
Important: The Big Lizard is an asymmetric strategy. Your upside risk is capped at $300, but your downside risk could be much larger. This makes stock selection and timing critical.
When to Use the Big Lizard
The Big Lizard works best in specific market conditions:
- High implied volatility: Options are expensive, maximizing your credit
- Neutral to slightly bullish outlook: You expect minimal price movement
- After a selloff: Volatility is elevated and puts are expensive
- Strong support levels: The stock has clear technical support below
- Earnings play: Collect elevated premium before earnings (advanced)
Managing the Position
Taking Profits Early
Because the maximum profit zone is narrow, consider taking profits when you have captured 25-50% of the maximum gain:
Profit Taking Example
You collected $7.00 in premium. Two weeks later, with minimal stock movement:
- Current position value: $4.00 to close
- Profit if closed: $7.00 - $4.00 = $3.00 ($300)
- Percentage of max profit: 43%
Taking this profit locks in $300 and frees your capital for new trades.
Defending the Downside
If the stock starts dropping, you have several options:
- Close the position: Accept a small loss before it becomes large
- Roll the put down: Buy back the short put and sell a lower strike
- Add a long put: Buy protection to cap your downside risk
- Convert to iron butterfly: Buy a put below your short strike
Managing the Upside
If the stock rallies toward your long call strike:
- You can let the position reach maximum loss ($300) - it is defined
- Consider rolling the call spread up and out for additional credit
- Close early if the stock momentum suggests further upside
Advantages of the Big Lizard
- High premium collection: ATM options have the most extrinsic value
- Defined upside risk: You know your maximum loss if the stock rallies
- Rapid time decay: ATM options decay fastest, benefiting sellers
- Flexibility: Can be adjusted and managed as the trade develops
- Works in high IV: Collects more premium when volatility is elevated
Risks and Disadvantages
- Substantial downside risk: Losses can be significant if the stock drops hard
- Narrow profit zone: Stock must stay near the strike for maximum profit
- Early assignment risk: ITM options may be assigned before expiration
- High margin requirement: The naked put requires significant capital
- Complex management: Requires active monitoring and adjustment
Example Trade Walkthrough
Let us follow a Big Lizard trade from start to finish:
Trade Setup - Day 1
Stock ABC at $50, 30 days to expiration, IV at 45%.
- Sell $50 call: $2.50
- Sell $50 put: $2.50
- Buy $55 call: $0.75
- Total credit: $4.25
Day 15 - Stock at $51
Position has decayed nicely:
- Current value to close: $2.75
- Unrealized profit: $1.50 (35% of max)
- Decision: Hold for more decay or take profit
Day 25 - Stock at $49
Stock dipped slightly but within range:
- Current value to close: $1.50
- Unrealized profit: $2.75 (65% of max)
- Decision: Close for $275 profit to manage risk
Tips for Success
- Size appropriately: Never risk more than 2-3% of your account on any single trade
- Choose strong stocks: Use stocks with solid fundamentals and support levels
- Watch volatility: Enter when IV is high, exit when it contracts
- Set stop losses: Have a predefined exit point on the downside
- Take profits early: Do not get greedy waiting for maximum profit
Track Your Big Lizard Positions
Pro Trader Dashboard automatically calculates your Greeks, tracks P/L, and alerts you when your Big Lizard positions need attention. See all your complex strategies in one dashboard.
Summary
The Big Lizard is an aggressive premium-selling strategy that collects substantial credit by selling an at-the-money straddle while using a long call for upside protection. It works best in high volatility environments on stocks you expect to trade sideways. While the upside risk is defined, the downside risk is substantial, making proper position sizing and risk management essential. When used appropriately, the Big Lizard can be a powerful tool for generating income in neutral markets.
Want to explore similar strategies? Check out our guide on the Jade Lizard or learn about iron condors for fully defined risk.