The Jade Lizard is one of my favorite options strategies! It has a very high probability of success and brings in a ton of premium. I trade a slightly modified version which I will explain below, but in concept its the same.
As far as I know Tom Sosnoff and the crew over at TastyTrade created the Jade Lizard or at least thats where I first heard of the strategy.
Traditionally, the Jade Lizard has 3 legs/parts:
- short put
- short call
- long call
I trade a modified version as mentioned. My version has 4 legs/parts and is actually technically defined as an iron condor or broken wing iron fly.
My version of the jade lizard has 4 legs/parts:
- short put
- long put
- short call
- long call
The traditional setup on the jade lizard is to sell an OTM (out of the money) short strangle and then buy a further OTM long call to protect against long side losses on the call side of the setup, but leaving the bottom, put side, open assuming you will either close the trade for a profit before expiration, close the trade for a loss before expiration, or let the short put get exercised and assume ownership of the underlying 100 shares.
If the trade goes your way and is set up properly, over time theta will cause time decay on the short strangle at a rate that is faster than the theta decay on the long call. This will lead to accumulating profit over time. For this to happen, the underlying price must remain somewhat near the one of the short strikes you sold or preferably in between the two short strikes.
If the trade goes against you, your loss will be capped on the call side due to the call that you purchased, but on the put side you have no protection and your loss will only be limited by the underlying’s price theoretically being able to go to $0.
The reason I love the Jade Lizard is bc I use it to acquire stock at a discount. I never use the jade lizard options strategy on a stock unless I am willing to own 100 shares. My hope is that I will win a few trades and then eventually get hit (exercised) and take ownership of the 100 shares with a ton of loaded premium, therefore owning the underlying stock at a discount. Then I usually immediately turn around and start selling covered calls against my 100 shares to collect even more premium while it hopefully goes up in price.
The one modification I usually, but not always make to my jade lizard setups is to sell a way out of the money put as well. The only reason I do this is bc it technically makes the strategy risk defined. This will cost you some profit dollars because you have to buy the “protective put”, but it allows me to run this strategy in my IRA and also greatly lowers the buying power effect (the amount of money your broker will hold in your account).
Most of the time there are only two scenarios where I will close an open jade lizard.
- I can close the trade for 50% or more of the original credit received
- I let my broker close and exercise the trade if the underlying price expires below the short put strike, therefore awarding me 100 shares of the underlying loaded with a huge perm discount
I typically use a 30-60 day timeframe on my modified jade lizards, but have been known to trade them with timeframes as short as 4 days if Im eager to own a stock and theres lots of volatility.
If you find yourself in a losing jade lizard trade and want to learn more about adjustments, Mike over at TastyTrade does a great job of explaining a few options here:
There’s also another options trading strategy that is similar to the Jade Lizard called the Big Lizard. if youre wondering about the differences between the two, check out the Jade Lizard vs Big Lizard video comparison below!
Ask me questions below! I’m always happy to answer them!