On this page
Jade Lizard Strategy: Sell Premium With No Upside Risk
A jade lizard is a three-leg option position that combines a short out-of-the-money put with a short out-of-the-money call vertical spread. The structure removes upside risk entirely when the total credit collected exceeds the width of the call vertical, leaving only downside exposure on the short put.
Key Takeaways
- A jade lizard combines a short OTM put with a short OTM call vertical sized so the total credit is at least equal to the call wing width.
- When credit >= call wing width, the upside has zero risk; downside risk mirrors a short put exposed to the full stock decline.
- A common mistake: collecting less than the wing width and calling it a jade lizard, that version still carries call-side loss.
- The structure is positive delta, short vega, and positive theta, suited to high-IV environments with a moderately bullish view.
Key Takeaways
- A jade lizard combines a short OTM put with a short OTM call vertical sized so the total credit is at least equal to the call wing width.
- When credit >= call wing width, the upside has zero risk; downside risk mirrors a short put exposed to the full stock decline.
- A common mistake: collecting less than the wing width and calling it a jade lizard, that version still carries call-side loss.
- The structure is positive delta, short vega, and positive theta, suited to high-IV environments with a moderately bullish view.
What It Is
The standard jade lizard has three legs in the same expiration:
- Short one out-of-the-money put at strike Kp
- Short one out-of-the-money call at strike Kc1
- Long one further out-of-the-money call at strike Kc2 (Kc2 > Kc1)
The call vertical defines the upside risk by width Kc2 - Kc1. The short put leaves downside open, capped only by the underlying going to zero. The position is opened for a net credit. The defining rule, as published in tastytrade's strategy primers, is that the total credit collected must be at least equal to the width of the short call spread.
When that condition is met, the position has zero risk above the short call strike. Above Kc2 the loss on the call vertical equals the wing width, and the credit cancels it out. The trade still has downside risk on the short put, similar in shape to a cash-secured short put.
The Intuition
A short strangle (short call plus short put) collects two premiums but has unlimited upside risk. An iron condor caps the upside at the cost of giving up some credit. A jade lizard sits between them. By replacing the naked short call with a defined-risk call vertical and pricing the trade so the credit at least offsets the call wing width, the trader sells two pockets of premium and zeroes out the upside risk while keeping the downside as a deliberate position.
The view fits a moderately bullish stance with elevated implied volatility. tastytrade's research highlights the jade lizard as well-suited to underlyings where IV rank is high and put skew is rich. The short put captures the rich put-side vol and the short call vertical funds the upside cap.
How It Works
Let credit C be the sum of the put premium plus call vertical premium. The condition for no upside risk is:
C >= Kc2 - Kc1
At expiration, the per-share payoffs are:
S < Kp: payoff = -(Kp - S) + C
Kp <= S <= Kc1: payoff = C
Kc1 < S < Kc2: payoff = C - (S - Kc1)
S >= Kc2: payoff = C - (Kc2 - Kc1)
If C >= (Kc2 - Kc1), the last line is non-negative, so the upside has no loss. Maximum profit equals C and is realised between the short put and the short call. Downside loss grows linearly below Kp until S reaches zero.
ASCII payoff (jade lizard at expiration)
profit
| ____________
| / \________
| / max=C upside flat
| /
| /
|________ /
| /
| /
| /
| /
+----/-----+----------+----------+--->S
| Kp Kc1 Kc2
| large
| loss
max profit = C (between Kp and Kc1)
max loss = Kp - C per share if S goes to 0 (downside)
upside loss = 0 if C >= Kc2 - Kc1
downside breakeven = Kp - C
Greeks at entry are positive delta (because the short put dominates the directional exposure), short vega, short gamma, and positive theta. Sinclair frames any short-strangle variant as primarily a volatility trade where the trader bets that realised volatility comes in below implied volatility.
Worked Example
Stock XYZ trades at $100. Implied volatility rank is in the top quartile. You open a 45-day jade lizard:
- Sell 90 put for $1.40
- Sell 110 call for $0.90
- Buy 115 call for $0.30
Net credit per share: 1.40 + 0.90 - 0.30 = $2.00, or $200 per contract set. Width of the call vertical: 115 - 110 = $5.
The credit ($2.00) is less than the call width ($5.00), so this configuration has upside risk equal to $5 - $2 = $3 per share above $115. To make a true zero-upside-risk jade lizard you would tighten the call wing or move strikes closer to spot until the credit covers the wing width. For example, narrow to a 110 / 112 call vertical at credit $0.55 plus the 90 put credit $1.40, total $1.95, which still falls just short of $2 width.
With original 90 / 110 / 115 jade lizard:
max profit = $200 per contract set if 90 <= S <= 110
upside loss above 115 = (5 - 2.00) = $300 per contract set
downside loss at S = 0 = (90 - 2.00) = $88 per share, $8,800 per contract set
downside breakeven = 90 - 2.00 = $88
If XYZ closes at $100, all three options expire worthless. $200 profit. If XYZ closes at $80, short put is in the money $10. P&L: $200 credit minus $1,000 = $800 loss. If XYZ closes at $120, call vertical is at full $5 width loss minus credit. $300 loss.
Common Mistakes
-
Skipping the credit check. The defining property of the jade lizard is credit >= call wing width. If you collect less than the wing width and call it a jade lizard anyway, you have a naked-skewed short strangle with capped upside loss but still loss-bearing on the call side.
-
Underestimating downside risk. The short put behaves like a cash-secured short put. A 30 percent drop in the underlying can crush the trade even though the upside is risk-free. Some practitioners pair the jade lizard with a longer-dated long put as tail protection, sometimes called a reverse jade lizard variant.
-
Trading low-IV underlyings. The structure depends on collecting enough credit to cover the call wing. In low implied volatility, distant strikes barely pay anything, and the configuration becomes impossible without using strikes too close to spot. tastytrade's research stresses high IV rank as the typical entry filter.
-
Forgetting earnings risk. Like any short-vol structure, holding through earnings exposes the trade to a multi-standard-deviation move. Either close before the print or use an expiration that ends before the event.
-
Ignoring assignment on the short put. Equity options are American-style, so the short put can be assigned early, especially near or in the money. Plan for the possibility of being put long stock at strike Kp.
Frequently Asked Questions
Q: What is a jade lizard strategy in simple terms? You sell an out-of-the-money put and sell a call vertical (short call plus long call at a higher strike) in the same expiration. If the credit collected equals or exceeds the width of the call vertical, the position has no risk if the stock rallies sharply.
Q: How does a jade lizard strategy affect investment decisions? It captures premium on two sides of the market while removing upside risk, leaving only the downside short-put exposure. It suits a moderately bullish view in a high-IV environment where put skew is elevated.
Q: What is a real-world example of a jade lizard strategy? With XYZ at $100, sell a 90 put for $1.40, sell a 110 call for $0.90, and buy a 115 call for $0.30. Total credit $2.00. Because credit is less than the $5 wing width, there is still $3.00 of upside risk. To close the upside, tighten the call wing until the credit covers its width.
Q: How can investors use the jade lizard responsibly? Always verify that the total credit is at least equal to the call wing width before calling the trade a jade lizard. If the credit falls short, rename it and resize the risk accordingly. Pair with an exit plan for the short put if the underlying drops more than expected.
Q: How is a jade lizard strategy different from an iron condor? An iron condor caps risk on both the upside and the downside using two verticals. A jade lizard caps only the upside and leaves the put side open, similar to a short put. The jade lizard collects more premium per trade but accepts unlimited downside below the put breakeven.
Sources
- tastytrade. "Jade Lizard Definition." https://www.tastytrade.com/tt/learn/jade-lizard?locale=en-US
- tastytrade. "Jade Lizard Part 1 (Market Measures)." https://www.tastytrade.com/tt/shows/market-measures/episodes/jade-lizard-part-1-03-07-2016
- Sinclair, E. (2010). Option Trading: Pricing and Volatility Strategies and Techniques. Wiley.
- Options Clearing Corporation. "Characteristics and Risks of Standardized Options." https://www.theocc.com/company-information/documents-and-archives/options-disclosure-document
Disclaimer
This article is educational content only and is not financial advice. Nothing here is a recommendation to buy, sell, or hold any security. Consult a licensed advisor before making investment decisions.