The Twisted Sister is a bearish options strategy that flips the Jade Lizard on its head. While the Jade Lizard eliminates upside risk for bullish traders, the Twisted Sister eliminates downside risk for bearish traders. By combining a short call with a put credit spread, you can profit from downward moves while having no risk if the stock rallies. This guide covers everything you need to know about this powerful strategy.
What is a Twisted Sister?
A Twisted Sister is a three-legged options strategy that combines a short out-of-the-money call with a put credit spread (selling a higher strike put and buying a lower strike put). When structured correctly, you collect enough premium to have no risk if the stock moves up, with your only risk being to the downside.
The Twisted Sister concept: This strategy is the mirror image of the Jade Lizard. Where the Jade Lizard has no upside risk, the Twisted Sister has no downside risk when set up correctly. You profit from bearish moves while being protected if you are wrong.
Components of the Twisted Sister
The strategy consists of three legs:
- Short call: Sell an out-of-the-money call above the current stock price
- Short put: Sell an out-of-the-money put below the current stock price
- Long put: Buy a put at a lower strike for downside protection
The Critical Rule
For a proper Twisted Sister, the total credit received must exceed the width of the put spread. This eliminates all downside risk.
Example Setup
Stock ABC is trading at $100. You have a bearish to neutral outlook.
- Sell the $105 call for $2.00
- Sell the $95 put for $2.50
- Buy the $90 put for $0.75
- Total credit: $3.75 ($375 per contract)
- Put spread width: $5.00
Since your credit ($3.75) is less than the put spread width ($5.00), let us adjust to create a proper Twisted Sister.
Proper Twisted Sister Setup
Adjusting strikes for better premium:
- Sell the $103 call for $3.00
- Sell the $97 put for $3.50
- Buy the $92 put for $1.25
- Total credit: $5.25 ($525 per contract)
- Put spread width: $5.00
Now your credit ($5.25) exceeds the put spread width ($5.00). Even if the stock crashes, your maximum loss on the put spread is $5, but you collected $5.25, guaranteeing a minimum $0.25 profit on the downside.
Profit and Loss Scenarios
Maximum Profit
Maximum profit occurs when the stock closes between your short put ($97) and short call ($103) at expiration:
- All options expire worthless
- You keep the entire $5.25 credit ($525 per contract)
Downside Scenario (Stock Drops)
If the stock plummets below $92:
- Your call expires worthless: +$3.00
- Your put spread reaches maximum loss: -$5.00
- Net: $5.25 - $5.00 = $0.25 profit
- You still profit even if the stock goes to zero
Upside Scenario (Stock Rallies)
If the stock rallies above $103:
- Your put spread expires worthless: +$2.25
- Your short call is in the money
- Breakeven: $103 + $5.25 = $108.25
- Maximum loss: Theoretically unlimited (short call exposure)
When to Use the Twisted Sister
The Twisted Sister is ideal in these conditions:
- Bearish to neutral outlook: You expect the stock to stay flat or drop
- High implied volatility: Premium-rich options allow larger credits
- After a rally: Calls are expensive from bullish momentum
- Resistance levels: The stock is approaching overhead resistance
- Before earnings: When you expect a miss or guidance lower
Twisted Sister vs Jade Lizard
| Feature | Jade Lizard | Twisted Sister |
|---|---|---|
| Market Bias | Neutral to Bullish | Neutral to Bearish |
| No Risk Side | Upside | Downside |
| Unlimited Risk Side | Downside (naked put) | Upside (naked call) |
| Spread Type | Call credit spread | Put credit spread |
Managing the Twisted Sister
Taking Profits
Consider closing when you have captured 50-75% of maximum profit. This locks in gains and reduces exposure to the naked call risk.
Defending the Upside
If the stock rallies toward your short call strike:
- Roll the call up and out: Buy back the short call and sell a higher strike with more time
- Add a long call: Buy a call above your short strike to cap risk (creates an iron condor-like structure)
- Close the put spread: Take profit on puts and manage the call separately
- Close entirely: Accept a loss if your thesis has changed
Rolling the Short Call
Stock rallies to $104 with 2 weeks left. Your $103 call is in the money.
- Buy back the $103 call for $3.50
- Sell the next month $107 call for $3.75
- Net credit: $0.25
You have raised your short strike by $4 and extended time while still collecting a small credit.
Managing the Downside
When the stock drops (your desired direction):
- The put spread will lose value as it goes in the money
- However, your credit exceeds the spread width, so you still profit
- Let the position work and collect your premium
Advantages of the Twisted Sister
- No downside risk: Properly structured, you profit even if the stock crashes
- Bearish exposure: Profits most when the stock drops moderately
- High probability: Win in most scenarios except a significant rally
- Premium collection: Collect more than a simple put spread
- Psychological comfort: No fear of a market crash
Risks and Disadvantages
- Unlimited upside risk: The naked call has unlimited loss potential
- Assignment risk: Short call may be assigned if deep ITM
- Margin requirements: Naked call requires significant margin
- Requires high IV: Need sufficient premium to exceed spread width
- Complex execution: Three legs require careful entry and management
Real-World Example
Let us walk through a complete Twisted Sister trade:
Day 1 - Entry
Tech stock XYZ at $150 after a strong rally. IV is elevated at 40%. You expect a pullback.
- Sell $155 call: $4.50
- Sell $145 put: $4.00
- Buy $140 put: $2.00
- Total credit: $6.50 (exceeds $5 spread width)
Day 20 - Stock at $143
Stock pulled back as expected:
- Call nearly worthless: $0.25
- Put spread approaching max loss but credit covers it
- Current position value: $5.25
- Profit if closed: $1.25 ($125)
Decision: Close for $125 profit or hold for potential rebound into the profit zone.
Tips for Success
- Verify your math: Always confirm credit exceeds put spread width
- Respect the upside risk: Have a plan if the stock rallies sharply
- Use liquid underlyings: Better fills and easier adjustments
- Trade high IV: Elevated volatility makes the setup easier
- Set alerts: Monitor the short call strike for early warning
Track Your Twisted Sister Trades
Pro Trader Dashboard automatically tracks multi-leg strategies like the Twisted Sister. Monitor your Greeks, see real-time P/L, and get alerts when positions need adjustment.
Summary
The Twisted Sister is the perfect strategy for bearish traders who want to collect premium without worrying about a market crash. By combining a short call with a put credit spread and ensuring your total credit exceeds the spread width, you eliminate downside risk entirely. The trade-off is upside risk from the naked call, making this strategy best for confident bearish outlooks. When properly executed, the Twisted Sister provides a unique combination of high probability and directional exposure.
Explore more strategies in our guides on Jade Lizards or broken wing butterflies.