What Is a Jade Lizard?
A jade lizard is a three-leg options strategy that combines a short out-of-the-money put with a short call spread (bear call spread) on the same underlying and expiration. The defining characteristic of the jade lizard is that the total credit received must exceed the width of the call spread, which eliminates all risk to the upside. This means the only risk is on the downside, similar to a cash-secured put, but with significantly more premium collected.
The jade lizard was popularized by tastytrade and has become a favorite among premium sellers who want to collect more credit than a simple short put or short call spread provides individually. By combining both strategies, you create a wider profit zone and the unique property of zero upside risk when structured correctly. The strategy profits from time decay and works best in high implied volatility environments.
A jade lizard has no upside risk only if the total credit received exceeds the width of the call spread. For example, if the call spread is $5 wide and total credit is $5.50, there is no upside risk because even at max loss on the call spread ($5), you still profit $0.50 from the excess credit. If total credit is less than the spread width, upside risk remains.
Jade Lizard Formulas
- 1Total credit = $2.00 + $1.50 = $3.50 per share ($350 per contract set)
- 2Call spread width = $110 - $105 = $5.00
- 3Max upside loss = $5.00 - $3.50 = $1.50 per share (upside risk NOT eliminated)
- 4To eliminate upside risk, need total credit > $5.00
- 5Downside breakeven = $95.00 - $3.50 = $91.50
- 6Max profit = $3.50 x 100 = $350 (when stock stays between $95 and $105)
- 7Downside risk: Stock drops to $0, loss = ($95 - $3.50) x 100 = $9,150
Jade Lizard Payoff Table
| Stock Price | Put P&L | Call Spread P&L | Total P&L | Status |
|---|---|---|---|---|
| $85 | -$800 | +$150 | -$650 | Below put breakeven |
| $91.50 | -$200 | +$150 | $0 | Downside breakeven |
| $95-$105 | +$200 | +$150 | +$350 | Max profit zone |
| $107.50 | +$200 | -$100 | +$100 | Partial call spread loss |
| $110+ | +$200 | -$350 | -$150 | Max upside loss |
Setting Up a Proper Jade Lizard
Jade Lizard Construction
- The jade lizard is most effective in high IV environments where option premiums are rich enough to exceed the call spread width
- Typical setups collect 60-80% of the capital at risk as premium
- The strategy has a wide profit zone spanning from the downside breakeven to infinity (when properly structured)
- Jade lizards require margin approval for the short put component
- Close at 50% of max profit to manage risk and free up capital for the next trade
While the jade lizard eliminates upside risk, the downside risk is identical to a short put: theoretically the stock could drop to zero. The total credit provides a cushion, but a severe decline can result in significant losses. Always position size based on the max downside risk, not the premium received.
A jade lizard is safer than a short strangle because the long call caps upside risk. A short strangle has unlimited risk on both sides. The jade lizard trades some premium (cost of the long call) for defined upside risk. For traders who want strangle-like premium with better risk management, the jade lizard is an excellent alternative.