Jade Lizard

Complete definition

A jade lizard is an options strategy combining a short put and a short call spread (also called a bear call spread). Specifically: sell 1 OTM put, sell 1 OTM call, buy 1 further-OTM call. The structure is designed to eliminate upside risk entirely by making the short call spread's max loss less than the total credit received. Construction: - Sell 1 OTM put (e.g., 0.30 delta) - Sell 1 OTM call (e.g., 0.30 delta) - Buy 1 further OTM call (e.g., 0.15 delta) — the long wing protects the short call The structure is named for its asymmetric P&L diagram, which resembles a jade lizard's profile — a flat top to the right (upside protection) and a downward slope to the left (downside exposure equivalent to owning the stock). Key mechanics: - **Total credit received**: must exceed the width of the short call spread for the structure to have no upside risk. - **Upside risk**: zero (or capped at a small loss) if total credit > call spread width. - **Downside risk**: substantial — equivalent to a short put. If the stock falls below the short put strike, losses accrue dollar-for-dollar with the stock. Example math: - Stock at $100 - Sell 95P for $1.50, sell 105C for $1.10, buy 110C for $0.50 - Total credit: $1.50 + $1.10 − $0.50 = $2.10 - Short call spread width: $105 − $110 = $5 - Max loss on call spread at expiration: $5 − $2.10 (call spread net credit) = $2.90... wait, recalculate. Call spread credit alone is $1.10 − $0.50 = $0.60. Max call-spread loss = $5 − $0.60 = $4.40. But total structure credit is $2.10. So upside loss = $4.40 − $2.10 = $2.30. Actually the math is: at $110+, the put expires worthless ($0), the call spread is worth $5 max. Net = $5 paid − $2.10 collected = $2.90 net loss. Not zero. Let me recompute. For zero-upside-risk math: total credit must exceed the call spread width. In the example above, total credit ($2.10) is less than the call spread width ($5), so the structure has upside risk. For a true jade lizard with no upside risk, you'd need to either widen the credits or narrow the call spread width. Corrected zero-risk jade lizard example: - Stock at $100 - Sell 95P for $2.40, sell 102C for $2.30, buy 105C for $1.30 - Total credit: $2.40 + $2.30 − $1.30 = $3.40 - Short call spread width: $3 - Upside max loss = $3 (spread width) − $3.40 (total credit) = $0.40 credit at any upside price. **No upside risk.** When jade lizards work: - **Range-bound markets**: the put expires worthless, the call spread expires worthless, you keep the full credit. - **Modest rallies**: the put expires worthless, the call spread partially activates but the total credit covers it. - **Modest declines**: the put deteriorates but stays OTM, you keep most of the credit. When jade lizards fail: - **Sharp declines**: the short put goes deep ITM, generating losses equivalent to owning stock from the strike down. - **Sudden vol expansions**: all three legs' IV expands; the structure loses paper value despite eventually profiting from theta. Jade lizards are popular among intermediate options sellers because they eliminate the upside-tail risk that worries many premium sellers. The downside risk (short put exposure) is the same as a standard cash-secured put — making the strategy effectively "CSP plus free call-side income".