Jade Lizard: Premium With No Upside Risk

A jade lizard is three legs. Short out of the money put. Short out of the money call. Long further out of the money call. The trick is the total credit collected must be greater than the width of the call spread. When that math works, the trade has zero upside risk.

Zero upside risk means no matter how high the stock goes, you cannot lose money to the upside. The premium covers any assignment on the short call by buying back the long call at a higher strike.

The Structure

• Sell a put below current price (the bullish leg).
• Sell a call above current price (the short side of the call spread).
• Buy a further out of the money call (the long protection leg).

Example on a $100 stock:

• Sell $95 put for $1.50
• Sell $105 call for $1.00
• Buy $108 call for $0.30
• Net credit collected: $2.20
• Call spread width: $108 minus $105 equals $3

Wait, in that example the credit ($2.20) is less than the spread width ($3). That is NOT a valid jade lizard. The whole point is credit must exceed call spread width. Let me redo with valid numbers.

• Sell $95 put for $2.50
• Sell $105 call for $1.50
• Buy $107 call for $0.80
• Net credit: $3.20
• Call spread width: $107 minus $105 equals $2

Credit ($3.20) is greater than call spread width ($2.00). Valid jade lizard. No upside risk.

Why No Upside Risk

If the stock rallies above $107 at expiration, the short $105 call is in the money by $2 or more. The long $107 call offsets it above $107. Max loss on the call spread is $200 (the $2 width times 100 shares).

You collected $320 in credit. Subtract the $200 max loss on the call spread. Net result: $120 profit minimum, even if the stock moons.

That is the magic of the structure.

Strike Selection

• Put strike: where you would actually be okay owning the shares (cash secured put logic).
• Short call strike: above current price by enough to make the math work. Usually 5 to 10% out of the money.
• Long call strike: tight enough to the short call that the spread width is smaller than the total credit collected. Usually one to two strikes wider.

When To Use It

Neutral to slightly bullish bias. Elevated implied volatility (premium is rich). 30 to 45 days to expiration for solid theta decay.

Stocks you would not mind owning at the put strike. The put side is real risk and assignment is a possible outcome.

NOT for crash candidates. NOT for stocks heading into earnings (the move can be sharper than the put strike allows).

Management

Take profit at 50% of max credit. Close the whole trade. Do not wait for full expiration in most cases.

If the put side is challenged, roll the put down and out for more credit if the chart still looks okay. If not, take the loss and move on.

If the call side is challenged but the credit is still greater than the spread width, hold. The structure protects you.

What Kills It

• Stock crash. The put side is the only risk and a hard crash takes you out.
• Volatility crush. If IV drops fast, the premium evaporates and the trade does not pay enough to be worth the risk.
• Wrong strike selection. If credit collected is less than the call spread width, you have upside risk. Not a jade lizard.
• Holding too long. Theta decay is great, but holding to expiration exposes you to last week gamma swings.

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