In this video, we’ll be discussing the Jade Lizard, a unique option strategy coined by the Tasty trade team. This strategy combines both an undefined risk strategy and a defined risk strategy, making it a hybrid approach. The Jade Lizard takes advantage of the put skew in index ETFs, where lower strike prices have higher volatility. It’s primarily used for index ETFs, as individual stocks may have the opposite skew. This strategy helps mitigate the risk of a naked call, which can make some traders uncomfortable. There are different variations of the Jade Lizard depending on the market outlook, and it’s important to consider factors such as deltas, premium percentages, and exit points. Overall, the Jade Lizard offers a riskless trade to the upside, making it an appealing option for those looking to capitalize on market movements in a controlled manner.
The Jade Lizard Strategy
Introduction
The Jade Lizard is a unique option strategy coined by the Tasty trade team, a brokerage education company. It is a hybrid strategy that combines elements of both undefined risk and defined risk strategies. The strategy takes advantage of the put skew in index ETFs, where lower strike prices have higher volatility. By using this strategy, traders can eliminate the risk associated with a naked call, which many traders find uncomfortable.
Overview
The Jade Lizard strategy is primarily used for index ETFs, as individual stocks may have the opposite skew. It is a popular choice for traders who want to benefit from the potential upside momentum of index ETFs while limiting their risk. The strategy involves selling a put option while simultaneously placing a bear call spread. This combination allows traders to collect premium, generate income, and potentially profit from the sideways or bearish movement of the underlying asset.
Advantages
The Jade Lizard strategy offers several advantages for traders. First, it takes advantage of the put skew in index ETFs, allowing traders to sell expensive options and buy cheaper options, potentially maximizing their returns. Second, it eliminates the risk of a naked call, providing peace of mind for traders who are uncomfortable with this type of risk. Finally, the strategy offers flexibility, with variations available for different market outlooks, including neutral, bullish, and bearish.
Variations
The Jade Lizard strategy can be adapted to different market outlooks. For a neutral strategy, the delta requirements for the short put and short call should be carefully considered. A delta of 16-20 for the short put and a delta of 30-35 for the short call are recommended. The call spread premium should be between 25-30% of the total premium, and the minimum premium should be at least 5-10% of the buying power requirement. Traders should aim to exit the trade at 21 days to expiration or when the profit reaches 40-50%.
For a bullish strategy, the delta requirements remain the same, but the focus shifts to the call spread premium. The minimum premium and exit strategy also remain unchanged. For a bearish strategy, constructing a riskless trade to the upside can be challenging. Pushing the short put further down may reduce the overall premium, requiring traders to carefully manage their risk.
Components of the Strategy
The Jade Lizard strategy consists of three key components: the short put, the short call, and the bear call spread. By selling a put option, traders collect premium from the buyer and take on the obligation to purchase the underlying asset at a predetermined price (the strike price) if it falls below that price at expiration. The short call involves selling a call option, which gives traders the obligation to sell the underlying asset at a predetermined price (the strike price) if it rises above that price at expiration. The bear call spread is the purchase of a call option at a strike price higher than the short call, limiting the potential losses if the price of the underlying asset rises significantly.
Neutral Strategy
In a neutral strategy using the Jade Lizard, traders should aim for a delta of 16-20 for the short put and a delta of 30-35 for the short call. The call spread premium should be at least 25-30% of the total premium, and the minimum premium should be 5-10% of the buying power requirement. Traders should look to exit the trade at 21 days to expiration or when the profit reaches 40-50%.
Bullish Strategy
For a bullish strategy, traders should follow the same delta requirements as the neutral strategy. The call spread premium, minimum premium, and exit strategy remain the same. By implementing the Jade Lizard strategy in a bullish market, traders can benefit from potential upside movement while limiting their risk.
Bearish Strategy
Constructing a riskless trade to the upside can be challenging in a bearish strategy using the Jade Lizard. Traders may need to push the short put further down, which can reduce the overall premium. Despite this challenge, traders can still benefit from potential downside movement while managing their risk through careful position sizing and risk management techniques.
Risk Management
Managing risk is an essential aspect of any trading strategy, and the Jade Lizard is no exception. Traders should be aware that the maximum loss in this strategy is limited to the initial buying power requirement. It is important to set clear exit points and adhere to them, especially if the trade is not performing as expected. Additionally, traders should consider position sizing and use appropriate risk management techniques to protect their capital.
Challenges
The Jade Lizard strategy comes with its own set of challenges. Constructing a riskless trade to the upside can be difficult, especially in a bearish strategy. Traders need to carefully consider the strike prices and manage their risk effectively. Additionally, the bearish strategy may result in reduced premiums, requiring traders to make adjustments to maintain profitability.
In conclusion, the Jade Lizard strategy offers traders a unique approach to options trading. By combining elements of undefined and defined risk strategies, traders can benefit from the put skew in index ETFs while managing their risk. With variations available for different market outlooks, the strategy provides flexibility and potential opportunities for profit. However, it is essential to carefully consider the delta requirements, premium percentages, and risk management techniques to maximize the effectiveness of this strategy.