The Jade Lizard is a clever options strategy that allows you to collect premium with no risk to the upside. By combining a short put with a call credit spread, you create a position that profits from neutral to bullish price action while eliminating the unlimited loss potential that comes with a naked strangle. This guide will show you exactly how to set up and manage this unique strategy.
What is a Jade Lizard?
A Jade Lizard is a three-legged options strategy consisting of a short out-of-the-money put and a call credit spread (short call plus long call at a higher strike). The key to a proper Jade Lizard is collecting enough total premium so that you have no risk if the stock rallies above your call spread.
The magic of the Jade Lizard: When structured correctly, you cannot lose money if the stock goes up. Your only risk is to the downside if the stock drops below your short put strike minus the premium collected.
Components of the Jade Lizard
The strategy has three legs that work together:
- Short put: Sell an out-of-the-money put below the current stock price
- Short call: Sell an out-of-the-money call above the current stock price
- Long call: Buy a call at a higher strike to cap your upside risk
The Critical Rule
For a proper Jade Lizard, the total credit received must be greater than the width of the call spread. This eliminates all upside risk.
Example Setup
Stock ABC is trading at $100. You have a neutral to slightly bullish outlook.
- Sell the $95 put for $1.50
- Sell the $105 call for $1.25
- Buy the $110 call for $0.50
- Total credit: $2.25 ($225 per contract)
- Call spread width: $5.00
Since your credit ($2.25) is less than the call spread width ($5.00), this is NOT a proper Jade Lizard. You would have $2.75 of upside risk. Let us fix it.
Proper Jade Lizard Setup
Adjusting strikes to collect more premium:
- Sell the $97 put for $2.50
- Sell the $103 call for $2.00
- Buy the $108 call for $0.75
- Total credit: $3.75 ($375 per contract)
- Call spread width: $5.00
Now your credit ($3.75) means you can only lose $1.25 on the call spread if the stock explodes higher. But wait, you collected $3.75, so even your worst case on the upside is a $2.50 profit.
Profit and Loss Scenarios
Maximum Profit
You achieve maximum profit when the stock closes between your short put and short call strikes at expiration. All options expire worthless and you keep the entire premium.
- Maximum profit: Total credit received ($375 in our example)
- Profit range: Between $97 and $103
Upside Scenario (Stock Rallies)
If the stock rallies above $108 (your long call strike):
- Your put expires worthless: +$2.50
- Your call spread is fully in the money: -$5.00
- Your long call gains value to offset the short call
- Net result: $3.75 - $5.00 = -$1.25 (BUT you still profit $2.50 from the put)
- Total P/L: $3.75 - $5.00 = Still a profit because credit > spread width loss
Downside Scenario (Stock Drops)
If the stock drops below $97:
- Your calls expire worthless: +$1.25 (net from call spread)
- Your put is in the money and you may be assigned
- Breakeven: $97 - $3.75 = $93.25
- Maximum loss: Theoretically the stock could go to zero
When to Use the Jade Lizard
The Jade Lizard is ideal in these market conditions:
- Neutral to slightly bullish outlook: You do not expect a big move down
- High implied volatility: Options are expensive, allowing larger credits
- After a selloff: Puts are pumped with fear premium
- Support levels: The stock is near a level where you would be happy to own shares
Advantages of the Jade Lizard
- No upside risk: When structured correctly, rallies cannot hurt you
- High probability: You profit in most scenarios except a significant drop
- Premium collection: Collect more premium than a simple credit spread
- Flexible management: Multiple ways to adjust and defend
- Lower margin: Usually requires less margin than a naked strangle
Risks and Disadvantages
- Downside risk: Significant losses if the stock drops sharply
- Assignment risk: The short put may be assigned early
- Complexity: Three legs require more monitoring
- Commissions: Three contracts mean higher transaction costs
- Requires high IV: Harder to set up properly in low volatility environments
Managing the Jade Lizard
Taking Profits
Consider closing the position when you have captured 50-75% of the maximum profit. This locks in gains and frees up capital for new trades.
Defending the Downside
If the stock drops toward your short put strike:
- Roll the put down and out: Buy back the put and sell a lower strike with more time
- Add a long put: Convert to an iron condor for defined risk
- Close the call spread: Take the profit on the calls and manage the put separately
- Take assignment: If you want to own the stock, let the put be assigned
Rolling Example
Stock drops to $96 with 2 weeks until expiration. Your $97 put is now in the money.
- Buy back the $97 put for $3.50
- Sell the next month $95 put for $3.75
- Net credit: $0.25
You have given yourself more time and lowered your strike while collecting additional premium.
Jade Lizard vs Short Strangle
| Factor | Short Strangle | Jade Lizard |
|---|---|---|
| Upside Risk | Unlimited | None (if set up correctly) |
| Downside Risk | Substantial | Substantial |
| Premium Collected | Higher | Lower (pays for long call) |
| Margin Required | Higher | Lower |
Tips for Success
- Always verify the math: Ensure total credit exceeds call spread width
- Choose liquid underlyings: Tight bid-ask spreads reduce slippage
- Use high IV environments: Easier to collect sufficient premium
- Set alerts: Monitor the short put strike for early action
- Have an exit plan: Know when you will take profits or cut losses
Track Your Jade Lizard Trades
Pro Trader Dashboard automatically tracks complex multi-leg strategies like the Jade Lizard. See your premium collected, current P/L, and get alerts when positions need attention.
Summary
The Jade Lizard is a versatile options strategy that lets you collect premium while eliminating upside risk. By combining a short put with a call credit spread and ensuring your total credit exceeds the call spread width, you create a position that profits from neutral to bullish price action. The trade-off is that you retain downside risk, making this strategy best suited for stocks you would not mind owning at a lower price. When used correctly, the Jade Lizard can be a powerful tool for generating consistent income.
Ready to explore more advanced strategies? Check out our guide on the Big Lizard strategy or learn about Twisted Sister spreads.