In this video, we’re taking a deep dive into the “3-10 The Jade Iron Condor Strategy” coined by the Tasty trade team. The Jade Lizard is a unique and effective trading strategy that combines an undefined risk and a defined risk strategy. It takes advantage of the put skew present in index ETFs, making it ideal for those who want to minimize risk in their trades. The video will guide you through constructing a neutral, bullish, and bearish Jade Lizard, providing strike selection guidelines, premium percentages, and exit points for each strategy. Whether you’re new to options trading or looking to expand your trading tactics, the Jade Lizard strategy is definitely worth exploring.
1. Introduction
Welcome to this comprehensive article on the Jade Lizard strategy. In this article, we will explore the Jade Lizard strategy in detail, including its definition, benefits, and application. Developed by the Tasty Trade team, the Jade Lizard is a hybrid trading strategy that combines elements of both undefined and defined risk strategies. This strategy takes advantage of the put skew present in index ETFs and can be an effective way to minimize risk and maximize profits. Whether you are new to options trading or an experienced trader looking to diversify your portfolio, the Jade Lizard strategy is worth considering.
2. Overview of the Jade Iron Condor Strategy
2.1 What is the Jade Iron Condor Strategy?
The Jade Iron Condor strategy is a hybrid trading strategy that combines an undefined risk strategy, known as the short put, with a defined risk strategy, the bear call spread. This combination allows traders to take advantage of the put skew found in index ETFs. The strategy involves selling more expensive options with higher volatility and buying cheaper options with lower volatility, creating a risk-managed position that can generate consistent profits.
2.2 Benefits of the Jade Iron Condor Strategy
The Jade Iron Condor strategy offers several benefits to traders. Firstly, it eliminates the risk of a naked call, which can be uncomfortable for some traders. By combining the short put and bear call spread, the strategy ensures that there is zero risk to the upside, protecting traders from substantial losses if the market rallies. Additionally, the strategy allows traders to take advantage of the put skew present in index ETFs, which can result in higher premiums and increased profitability.
2.3 Consideration for Index ETFs
The Jade Iron Condor strategy is primarily used for index ETFs rather than individual stocks. This is because index ETFs typically exhibit put skew, while individual stocks may have the opposite skew, known as call skew. The put skew in index ETFs provides opportunities for traders to sell more expensive options and buy cheaper options, maximizing their potential profits. Traders should consider this when selecting assets for the Jade Iron Condor strategy.
3. Understanding the Jade Lizard Strategy
3.1 Explanation of the Jade Lizard Strategy
The Jade Lizard strategy is a variation of the Jade Iron Condor strategy that takes advantage of put skew in index ETFs. It involves selling an out-of-the-money put option, selling an out-of-the-money call spread, and buying an out-of-the-money call option. This combination of trades creates a risk-managed position that allows traders to profit from the put skew while minimizing potential losses.
3.2 Defining Risk in the Jade Lizard Strategy
The Jade Lizard strategy eliminates the risk of a naked call present in other strategies like the strangle. By incorporating the call spread, the strategy limits potential losses if the market rallies. This makes it an attractive option for traders who are uncomfortable with the risk associated with a naked call. With the Jade Lizard, traders can still profit from the market trending upward without the same level of risk.
3.3 Exploiting Put Skew in Index ETFs
One of the key advantages of the Jade Lizard strategy is its ability to take advantage of the put skew present in index ETFs. Put skew refers to the phenomenon where lower strike prices have higher implied volatility than higher strike prices. This means that the options with lower strike prices are more expensive. By selling the more expensive put option and buying the cheaper call option, traders can capitalize on this skew and potentially increase their profitability.
4. Application of the Jade Lizard Strategy
4.1 Suitable Assets for the Jade Lizard Strategy
The Jade Lizard strategy is most commonly used with index ETFs due to their consistent put skew. These broad-based index ETFs, such as IWM, SPY, and QQQ, tend to have positive drift over the long term, making them ideal candidates for this strategy. However, it’s important to note that individual stocks may have the opposite skew, known as call skew, which would require a different strategy.
4.2 Potential Risks Associated with Individual Stocks
While the Jade Lizard strategy is effective for index ETFs, it may not be suitable for individual stocks due to the presence of call skew. Call skew occurs when higher strike prices have higher implied volatility than lower strike prices. This means that selling the more expensive call options and buying the cheaper put options can result in a less profitable trade. Traders should consider this when applying the Jade Lizard strategy to individual stocks.
5. Advantages of the Jade Lizard Strategy
5.1 Elimination of Naked Call Risk
One of the notable advantages of the Jade Lizard strategy is the elimination of the risk associated with a naked call. A naked call refers to the sale of a call option without owning the underlying asset. This strategy can be risky as it exposes traders to unlimited losses if the price of the underlying asset rises significantly. With the Jade Lizard strategy, traders can protect themselves from these potential losses by incorporating a defined risk strategy.
5.2 Minimizing Risk through Option Selection
The Jade Lizard strategy involves selling more expensive options and buying cheaper options. By selecting options with the right strike prices, traders can maximize their potential profits while minimizing their exposure to risk. The strategy allows traders to take advantage of the put skew in index ETFs, which can result in higher premiums and reduced risk.
5.3 Capitalizing on Implied Volatility Skew
The Jade Lizard strategy allows traders to capitalize on the put skew present in index ETFs. By selling higher-priced put options with higher implied volatility and buying lower-priced call options with lower implied volatility, traders can potentially increase their profits. This strategy takes advantage of the pricing disparities created by the put skew, enabling traders to generate consistent returns.
6. Constructing the Jade Lizard Strategy
6.1 Steps for Building a Neutral Jade Lizard
Constructing a neutral Jade Lizard requires careful consideration of strike prices. The short put should have a delta of 16 to 20, similar to a strangle. The short call side should have a delta of 30 to 35 and be slightly closer to the market. This is important to ensure a riskless trade to the upside. It’s essential to adjust the strikes on a trading platform to find the right configuration for a neutral Jade Lizard.
6.2 Building a Bullish Jade Lizard
To construct a bullish Jade Lizard, traders can widen the spread between the short call and the long call. By widening the spread, traders can collect more premium and potentially increase their profits. This can be ideal in a bullish market where there is a higher probability of the market going up.
6.3 Implementing a Bearish Jade Lizard
A bearish Jade Lizard involves widening the spread between the short put and the long put. By widening the spread, traders can collect more premium on the put side, maximizing their potential profits in a bearish market.
7. Guidelines for Strike Selection
Strike selection is crucial in implementing the Jade Lizard strategy. Traders should experiment with different strike prices on a trading platform to find the right configuration that ensures a riskless trade to the upside. It’s important to consider the delta, premium percentages, and the desired risk profile when selecting strikes for a Jade Lizard trade.
8. Premium Percentages in the Jade Lizard Strategy
Premium percentages play a critical role in determining the success of a Jade Lizard trade. The call spread premium should be at least 25 to 30 percent of the total premium to ensure the trade is worthwhile. Traders should aim for premium percentages that maximize their potential profits while minimizing risk.
9. Exit Points and Adjustments
Knowing when to exit a Jade Lizard trade is vital for managing risk and maximizing profits. Traders should set clear guidelines for when they will exit a trade based on their desired profit target and risk tolerance. Adjustments may also be necessary if the market moves significantly. Understanding how to make adjustments to a Jade Lizard trade can help traders mitigate losses and optimize their positions.
10. Conclusion
The Jade Lizard strategy is a hybrid trading strategy that combines the benefits of both undefined risk and defined risk strategies. By taking advantage of the put skew in index ETFs, the Jade Lizard strategy allows traders to minimize risk while potentially increasing profits. With careful strike selection, proper premium percentages, and a clear understanding of exit points and adjustments, traders can effectively implement the Jade Lizard strategy in their trading approach. Whether you’re a seasoned trader or just starting out, the Jade Lizard strategy is a valuable tool to consider for your options trading portfolio.