How a Jade Lizard Option Trading Strategy Works

 

A jade lizard option strategy is a neutral options trading strategy that profits when the underlying asset stays within a specific price range. It is a variation of an iron condor, but with the addition of a long put option that is further out-of-the-money (OTM) than the short put option. This limits the risk of the trade, but also reduces the potential profit.

To create a jade lizard spread, you will need to sell a put option and a call option with the same expiration date, but with different strike prices. The strike prices should be equidistant from the current price of the underlying asset. You will also need to buy a put option with the same expiration date, but with a strike price that is even further OTM than the short put option.

For example, let's say you want to create a jade lizard spread on Visa stock. The current price of Visa stock is $210. You would sell a put option with a strike price of $205 and a call option with a strike price of $215. You would also buy a put option with a strike price of $200.

If Visa stock stays within the range of $205 to $215 at expiration, you will make a profit. This is because the options you sold will expire worthless, and the options you bought will be worth the premium you paid for them.

However, if Visa stock moves too much, you will lose money on the trade. If Visa stock moves below $200, you will lose money on the trade. This is because you will be obligated to sell 100 shares of Visa stock at $200, even though they are worth more than that.

The maximum profit for a jade lizard spread is the premium you received for selling the options. The maximum loss is limited to the net debit you paid for the options you bought.

Jade lizard spreads are a good option for traders who want to profit from a sideways market. They are also a good way to limit risk, as the maximum loss is known in advance. However, jade lizard spreads also have limited profit potential.

Here are some of the advantages of using a jade lizard option strategy:

• Limited risk: The maximum loss for a jade lizard spread is known in advance, which makes it a relatively low-risk strategy.
• Profitable in sideways markets: Jade lizard spreads can be profitable in sideways markets, where the underlying asset does not move much.
• Easy to execute: Jade lizard spreads are relatively easy to execute, as they can be created with a single trade.

Here are some of the disadvantages of using a jade lizard option strategy:

• Limited profit potential: The maximum profit for a jade lizard spread is the premium you received for selling the options.
• Not suitable for all markets: Jade lizard spreads are not suitable for all markets, as they will not be profitable if the underlying asset moves too much.
• Requires careful management: Jade lizard spreads require careful management, as you need to monitor the underlying asset and close the trade if it moves outside of your desired range.

Overall, jade lizard spreads are a versatile options trading strategy that can be used to profit from a variety of market conditions. However, it is important to understand the risks and rewards involved before using this strategy.