Options strategy - Jade Lizard

The Jade Lizard is an options trading strategy that combines a short put spread and a short call option on the same underlying asset. It is a strategy used when the trader has a neutral to slightly bullish outlook on the underlying asset.

Here's how the Jade Lizard works:

1. Identify the underlying asset: Choose the stock, index, or any other financial instrument on which you want to execute the strategy.

2. Determine the strike prices: Select three strike prices - two for the short put spread and one for the short call option.

3. Sell the put spread: Sell a put option with a lower strike price and simultaneously buy a put option with an even lower strike price. The premium received from selling the put spread creates the initial credit.

4. Sell the call option: Sell a call option with a strike price higher than the higher strike price of the put spread. This is done independently, without any additional long option.

5. Execute the trade: Sell the put spread and the call option simultaneously. This will result in a net credit, as the premium received from selling the spreads will be higher than the premium paid for buying the put option.

6. Profit and loss potential: The Jade Lizard has a limited profit potential and a limited loss potential. The maximum profit is achieved if the price of the underlying asset is above the higher strike price of the call option at expiration. The maximum loss occurs if the price of the underlying asset is below the lower strike price of the put spread at expiration. The difference in strike prices of the put spread minus the net credit received is the maximum potential profit, while the net credit received is the maximum potential loss.

The Jade Lizard strategy is typically employed when the trader expects the price of the underlying asset to remain range-bound or experience a slight upward move. It allows for some downside protection through the put spread while generating additional income through the sale of the call option. Traders should consider factors like implied volatility, time decay, and market conditions before employing a Jade Lizard strategy. Managing and adjusting the position may be necessary as the market evolves.

Jade lizards are a relatively low-risk options strategy that can be used to generate income or to hedge against a large move in the price of an asset. However, it is important to note that there is still some risk involved, as the maximum loss is not eliminated.

Here are some of the pros and cons of jade lizards:

Pros:

• Limited risk

• Potential for moderate profits

• Can be used to generate income

• Can be used to hedge against a large move in the price of an asset

• No upside risk

Cons:

• Limited profit potential

• Requires a neutral outlook

• Can be complex to understand

If you are considering using a jade lizard, it is important to understand the risks involved and to make sure that it is a suitable strategy for your investment goals.