The jade lizard is an advanced options strategy that combines a short put with a short call spread. What makes it unique is the possibility of eliminating upside risk entirely while still collecting premium. If set up correctly, you cannot lose money on the upside, no matter how high the stock goes. This guide explains how to construct and manage jade lizards.
What is a Jade Lizard?
A jade lizard consists of three options:
- Sell 1 out-of-the-money put
- Sell 1 out-of-the-money call
- Buy 1 further out-of-the-money call
The key feature: When the total credit received exceeds the width of the call spread, you have no risk on the upside. Even if the stock rallies dramatically, you cannot lose money above your call strikes. Risk only exists on the downside.
How to Set Up a Jade Lizard
Follow these steps for a proper jade lizard:
Step 1: Select Your Put Strike
Sell an out-of-the-money put below the current stock price. Typical Delta: 0.20-0.30.
Step 2: Select Your Call Spread Strikes
Sell a call above the current stock price and buy a call 5-10 points higher. This creates a bear call spread.
Step 3: Verify the Credit Exceeds Call Spread Width
This is crucial. If your call spread is $5 wide, your total credit must be more than $5.00.
Example: Jade Lizard Setup
Stock XYZ is trading at $100.
- Sell 1 $95 put for $1.50
- Sell 1 $105 call for $2.50
- Buy 1 $110 call for $1.00
Total credit: $1.50 + $2.50 - $1.00 = $3.00
Call spread width: $110 - $105 = $5.00
Since credit ($3.00) is less than spread width ($5.00), this setup HAS upside risk.
Better setup: Adjust strikes until credit exceeds $5.00, or use a narrower call spread.
No Upside Risk: The Math
When the credit exceeds the call spread width, here is what happens on a rally:
Example: No Upside Risk Jade Lizard
Stock at $100. You collect $5.50 total credit:
- Sell $95 put for $2.00
- Sell $105 call for $4.50
- Buy $110 call for $1.00
Credit: $5.50. Call spread width: $5.00.
If stock rallies to $150 at expiration:
- $95 put: expires worthless (profit $2.00)
- $105 call: worth -$45.00 (150-105)
- $110 call: worth +$40.00 (150-110)
- Call spread loss: $45 - $40 = $5.00
- Net P&L: $5.50 credit - $5.00 loss = +$0.50 profit
No matter how high the stock goes, you still make at least $0.50!
Profit and Loss Scenarios
Maximum Profit
Achieved when the stock stays between the put strike and the short call strike at expiration. All options expire worthless, and you keep the entire credit.
Upside Risk (if credit < spread width)
If the stock rallies beyond your long call and your credit was less than the spread width, you have limited loss equal to: spread width - credit received.
Downside Risk
Your main risk. If the stock drops below your put strike, you face assignment or loss. Maximum downside loss = put strike - credit received (if stock goes to zero).
Break-Even Points
- Downside break-even: Put strike - total credit
- Upside break-even: Only exists if credit < spread width
Risk profile: A jade lizard has unlimited downside risk (like a short put) but limited or no upside risk. It is best used when you are bullish to neutral on the stock and want to collect premium.
When to Use a Jade Lizard
The jade lizard works best in these situations:
- Bullish to neutral outlook: You believe the stock will not drop significantly
- High implied volatility: Rich premiums make it easier to exceed spread width
- Willing to own stock: If assigned on the put, you are okay with buying shares
- Want to eliminate upside risk: Comfortable with downside exposure but worried about rallies
Jade Lizard vs Short Strangle
A jade lizard is similar to a short strangle but with protection:
Short Strangle
- Sell put + sell call
- Unlimited risk on both sides
- Higher credit (no call protection cost)
Jade Lizard
- Sell put + sell call spread
- Limited or no upside risk
- Lower credit (cost of long call)
- Still has unlimited downside risk
Managing a Jade Lizard
Profitable Trade
- Close early at 50% of max profit to reduce risk
- Let expire if comfortable with expiration risk
Stock Moves Against You (Down)
- Roll the put down and out for a credit
- Close the entire position for a loss
- Accept assignment and sell covered calls
Stock Rallies Into Call Spread
- If no upside risk: let it expire and collect remaining profit
- If upside risk exists: roll up the call spread for a credit
Example: Rolling a Threatened Put
You sold the $95 put and the stock drops to $96.
- Buy back the $95 put for $3.50
- Sell a new $90 put, 30 days out, for $4.00
- Net credit on roll: $0.50
You have reduced your strike from $95 to $90 and added time, while collecting an additional credit.
Ideal Market Conditions
Jade lizards perform best when:
- IV is elevated: Higher premiums make the no-upside-risk structure easier to achieve
- IV rank above 50%: Options are relatively expensive
- Stock is range-bound or slightly bullish: Maximizes probability of profit
- You have a bearish-on-volatility view: Expect IV to decrease
Common Jade Lizard Mistakes
- Not verifying the credit/spread ratio: Always confirm credit exceeds call spread width for true no-upside-risk.
- Ignoring downside risk: The strategy still has unlimited downside like a short put.
- Poor strike selection: Strikes too close to current price increase assignment risk.
- Trading in low IV: Hard to get enough credit to eliminate upside risk.
- Not having an exit plan: Decide in advance how you will manage if tested.
Track Your Jade Lizard Positions
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Summary
The jade lizard is a premium-selling strategy that can eliminate upside risk when properly structured. By combining a short put with a short call spread, traders can profit from time decay while protecting against rallies. The key is ensuring your total credit exceeds the width of the call spread. Remember that downside risk remains, so manage the trade accordingly.
Learn more about related strategies in our guides on credit spreads, strangles, and iron condors.