Jade Lizard Option Strategy
What are the characteristics of this option strategy?
The Jade Lizard Option Strategy is a type of combination spread involving both calls and puts. It is typically constructed using the trade of a long call spread and a short put. This strategy profits when the underlying security holds its position or rallies, while limiting risk if the underlying security moves against the position.
Is this a bullish, bearish or neutral strategy?
The Jade Lizard is typically a mildly bullish strategy, although it can also be used as a neutral or bearish strategy. In a bullish configuration, the strategy profit from a rally in the underlying security or from a moderate opposition towards the entry positions. In the neutral configuration, the strategy is hoping for a limited range in the underlying security, so that there is a balance between the premiums from the long and short position. In a bearish configuration, the strategy can profit from a moderate decline in the underlying security, or from limited upside movement.
Is this a beginner or an advanced option strategy?
The Jade Lizard strategy is usually classified as an advanced option strategy. It is not recommended for beginner traders as the strategy requires knowledge of different types of options and a good understanding of the workings of the options markets.
In what situation will I use this strategy?
The Jade Lizard strategy is typically used when traders expect moderate moves in the underlying security, but with limited downside exposure. The strategy can be used when an individual expects the stock to hold its position or make a moderate move to either side of the strike price.
Where does this strategy typically fall in the range of risk-reward and probability of profit?
The Jade Lizard strategy will typically fall into the middle range in both risk-reward and probability of profit. Depending on the configuration of the strategy, there can be a higher risk-reward ratio or a higher probability of profit. Generally, this strategy is known for its low risk profile, moderate reward prospects, and relatively higher probability of profit.
How is this strategy affected by the greeks?
The Jade Lizard strategy is affected by the various greek measures in options. In particular, delta and vega will have a significant impact on the performance of the strategy. The delta of the strategy measures the exposure to directional movements in the underlying asset, while the vega of the strategy measures the exposure of the position to changes in volatility.
In what volatility regime (i.e VIX level) would this strategy be optimal?
The Jade Lizard strategy can be used in a variety of volatility environments, but it would typically be most optimal when the VIX is between 10-15. When the VIX is at this level, the options will have enough premium to set up the desired spread and meet the desired reward or risk profile. When the VIX is higher, the options could become too expensive and reduce the risk-reward ratio of the strategy. When the VIX is lower, there may be an opportunity for a higher risk-reward ratio, but at the cost of reduced probability of profit.
How do I adjust this strategy when the trade goes against me? And how easy or difficult is this strategy to adjust?
If the trade goes against the desired direction, then there are several adjustments that can be made to the Jade Lizard strategy. One of the simplest ways to adjust the trade is to roll the short option out, so that the trade is moved to a further expiration. Another option is to split the offsetting position into two longs, so that one of the longs has a higher delta and the other has a lower delta. This allows for an increase in volatility exposure and a decrease in delta exposure. Adjusting the strategy is relatively easy, and the result is often quicker and less expensive than having to move the entire position or close it and open another.
Where does this strategy typically fall in the range of commissions and fees?
The Jade Lizard strategy typically requires trading multiple options contracts and could result in a higher range of commissions and fees. It is important to factor in commissions and fees when planning a trade and always do the calculations in advance. Depending on the size of the trade and the broker, the commissions and fees could be higher than average.
Is this a good option income strategy?
The Jade Lizard strategy can be used as an option income strategy, but the focus should be on conservative positions that can generate a steady stream of income. While the strategy is for limited risk, it is important to remember that the risks of long options can still be significant and are not suitable for all traders.
How do I know when to exit this strategy?
The ideal exit for the Jade Lizard strategy is when either the long option spreads or short option spreads reach its maximum profit or maximum loss. It should be noted that this strategy will typically not generate large profits within a short period of time, so the decision to exit should be made when the desired reward to risk ratio has been achieved.
How will market makers respond to this trade being opened?
The market makers will typically respond to the Jade Lizard strategy by adjusting the bid/ask spread to protect their interest in the trade. For example, if the spread is placed in a tight range, then they may adjust the spreads to wider ranges to protect their position.
What is an example (with calculations) of this strategy?
Here is a simple example of the Jade Lizard strategy. Assuming the stock is trading at $275, a trader can sell one out of the money call option at the strike price of $280, and then purchase one out of the money call option at the strike price of $285. At the same time, the trader can sell one out of the money put option at the strike price of $270. The net credit of these trades is $457, and the maximum profit is when the stock is trading between $265 and $285. The maximum potential reward would $457 in this case while maximum potential loss if stock is trading between $285 is capped at $50 while if stock trades below $265 is unlimited
MarketXLS
MarketXLS is a powerful tool for options traders and can make the process of creating and adjusting the Jade Lizard strategy much easier. MarketXLS offers traders a suite of options analysis tools that can help them find the best strike price, assess risk, backtest strategies, and analyze options volatility. Combined with its stock analysis tools and portfolio tracking capabilities, MarketXLS can help traders maximize their returns and reduce the risk associated with trading options.
Here are some templates that you can use to create your own models
Search for all Templates here: https://marketxls.com/templates/