The jade lizard is a three-leg options structure that collects premium on a neutral-to-bullish view. Its distinguishing feature is that, when built correctly, it carries no risk if the market rises sharply. All of its risk sits on the downside.
This article explains how a jade lizard is built, works through an example consistent with the other strategy articles on this site, explains the downside it keeps, and compares it with a short strangle.
How it is built
A jade lizard combines two pieces in the same expiry:
A sold put option below the current price.
A bear call spread above the current price: a sold call option, and a bought call option at a higher strike.
The key design rule is that the total credit received must be at least as large as the width of the call spread. If it is, then even if the market rises far above both call strikes, the maximum loss on the call spread is fully covered by the credit, and the position cannot lose money on the upside.
The sold put option has no protection, so the position does carry risk if the market falls sharply.
It is essentially a short strangle whose upside has been capped by buying a call option, sized so that the cap is paid for by the premium collected.
A worked example
Suppose an index is at 24,000. Using illustrative two-week premiums consistent with the other examples on this site:
Sell the 23,800 put option at 88.
Sell the 24,300 call option at 60.
Buy the 24,400 call option at 40.
Net credit: 88 + 60 − 40 = 108 per unit. Multiply by the lot size for rupees.
Call spread width: 24,400 − 24,300 = 100. Since the credit of 108 exceeds the width of 100, there is no upside risk.
At expiry, between 23,800 and 24,300: all options expire worthless. Profit: 108, the maximum.
At expiry, above 24,400: the call spread loses its full width of 100. Profit: 108 − 100 = 8. Still positive, however high the index goes.
At expiry, below 23,800: the sold put option loses one point for every point below the strike. Breakeven is 23,800 − 108 = 23,692. Below that, losses grow as the index falls.
So the position earns its full credit across a wide middle range, earns a little on a large rally, and loses on a fall below 23,692.
The downside it keeps
The structure removes upside risk but keeps a naked short put option. That has consequences.
Losses on a sharp fall can be large. The loss grows with every point below the breakeven, limited only by the index falling to zero.
Falls are often fast. Markets tend to fall more abruptly than they rise, frequently with gaps. A position whose risk is on the downside is exposed to exactly that pattern.
Volatility rises in falls. When the market drops, implied volatility usually rises, increasing the value of the sold put option before expiry and deepening interim losses.
Margin. Because of the naked put option, margin requirements are substantial and can rise in volatile sessions.
Traders who want this shape with limited downside sometimes buy a further put option below the sold one. That turns the structure into a defined-risk position, at the cost of some of the credit.
Compared with a short strangle
A short strangle sells an OTM put option and an OTM call option with no protection on either side. It has risk in both directions.
This structure trades some of the strangle's credit for the removal of upside risk. In the example, a strangle selling the 23,800 put option and the 24,300 call option would collect 148, against 108 here. In return, this structure cannot lose on a rally.
The choice depends on the view. A trader who is comfortable with downside risk but worried about a sharp rally may prefer this structure. A trader worried about a sharp fall would not, because that is precisely the risk it keeps.
Compared with a bull put spread, which caps downside risk but collects less, the jade lizard collects more and keeps an open-ended downside.
There is also a reverse version for a neutral-to-bearish view: sell a call option above the price and a bull put spread below it, with the credit at least as large as the put spread's width. It removes downside risk and keeps the upside open, mirroring everything described here.
When it fits, and managing it
Fits: a neutral-to-mildly-bullish view, a trader with adequate margin and a firm loss limit on the downside, and periods when implied volatility is relatively high, so premiums are rich.
Does not fit: small accounts, traders without a clear plan for a sharp fall, and periods with major scheduled events that could trigger a large drop.
Check the credit rule every time. If premiums change so that the credit falls below the call spread width, the upside is no longer fully protected.
Set a downside exit in advance, based on the index level or the value of the sold put option.
Take profits early once a meaningful share of the credit is earned, rather than holding into the final days.
Enter all legs together as a basket order.
An account with basket orders and payoff views
See the payoff, margin and upside protection before placing all legs. Free to open
Prices in the example are illustrative, not market data. Lot sizes, margin rules and charges are set by the exchanges and SEBI and change from time to time. This is educational material, not advice, and no position is recommended. We run no tips group and no signal service, we manage nobody's money, and no return is promised. Derivatives can lose more than the amount blocked against them.
Disclosure: the account-opening link on this page is under Atul Shrivastava's Zerodha Authorised Person registration (NSE AP Reg: AP2516003481; Zerodha Broking Ltd. SEBI Reg: INZ000031633) and earns a revenue share. TheFinBaba is not a SEBI-registered Investment Adviser — this content is educational, not investment advice.
Frequently Asked Questions
What is a jade lizard options strategy?
A three-leg structure that sells a put option below the price and a bear call spread above it, collecting a credit at least as large as the call spread's width so that there is no upside risk.
Does a jade lizard have unlimited risk?
Not on the upside, if the credit exceeds the call spread width. On the downside the sold put option is unprotected, so losses grow as the price falls.
How do I calculate the breakeven of a jade lizard?
Subtract the net credit from the put option's strike. In the example, 23,800 minus 108 gives 23,692.
How is a jade lizard different from a short strangle?
A short strangle has risk in both directions. A jade lizard gives up part of the credit to buy a call option that removes upside risk, keeping only the downside.
Can I limit the downside of a jade lizard?
Yes, by buying a further put option below the sold one, which makes the position defined-risk at the cost of some credit.
Related Reading
- Strike zones used in the structure
- Why max pain should not set strikes
- The short strangle it modifies
- The bear call spread on its upside
- Why the put side pays more
- A fully defined-risk alternative
Disclaimer: TheFinBaba provides educational content only - this is not investment advice. Trading involves risk of loss.
