The Jade Lizard Strategy: A No-Loss Options Setup?

Is there really an option strategy with no risk of loss?

The Jade Lizard combines a short put and a short call spread. Some traders refer to it as the “no loss” strategy, which is technically accurate in some circumstances, but it is not a guarantee across the board. It is understandable why some traders are drawn to the concept of “zero-risk” setups, along with the other perks of wide profit margins, income generation opportunities, and flexibility. However, it’s key to understand some of the Jade Lizard’s limitations before using it as a dedicated strategy.

The goal of this guide is to ultimately break down how the Jade Lizard works, when to use it, and if it truly offers “no loss” potential. You won’t experience any upside risk if you structure the trade correctly, but there are some downsides to using the Jade Lizard. Let’s dive in and see if the Jade Lizard is creating a false sense of security with traders or if it’s simply a safe credit spread option that makes for a smoother trading experience.

What Is the Jade Lizard Strategy?

This options trading strategy involves combining a short call spread with a short put option. The goal with the Jade Lizard is to collect a net credit (also known as a “premium”) and keep that net credit as profit if the underlying asset’s price remains in a specific range by the time of the option contract’s expiration date. The Jade Lizard is best used in market conditions where the outlook is either neutral or slightly bullish, with the idea being that stock prices need to remain relatively stable within the range laid out in the trade setup.

The Components

Now that you have a basic understanding of how the Jade Lizard is set up, how it becomes profitable, and the best market conditions to use it, let’s quickly run through the components of the trade to gain a deeper understanding of the logistics involved in setting it up.

• Short Put—This part of the Jade Lizard involves the trader selling a put option with a strike price that is well below the current market price. The trader ultimately secures a profit if the stock price stays above the strike price (a bullish assumption).
• Short Call Spread—This segment of the Jade Lizard setup involves the trader selling a call option with a lower strike price and buying another call option with a higher strike price. (short call + long call)

A Credit Spread Strategy

The Jade Lizard is a credit spread strategy that features multiple legs, generating income from the trade through a combination of a short put and a short call spread. The premium that the trader receives from selling the put and call spread is greater than the width of the call spread, which results in a trade with no upside risk. Even if the price of the underlying asset goes up significantly, the maximum loss is ultimately limited to the difference between the strike prices for the call spread (subtracting the premium received).

How the Jade Lizard Works

To provide you with a firm understanding of how a Jade Lizard works, we have included a small example of the trade strategy in action, using hypothetical numbers and scenarios. Let’s say a trader is going to use the Jade Lizard and the stock they’re dealing with is called “XYZ stock,” which is currently trading at $100.

Follow the steps below to set up the trade. Remember that the Jade Lizard profits when the market outlook is either neutral or slightly bullish. This informs the numbers you will use when selling or buying calls and puts for this trade.

Example

• Sell 1 put at $95
• Sell 1 call at $105
• Buy 1 call at $110

Outcomes

• The Stock Price Falls Below $95—The put options sold go in-the-money, which means the trader is obligated to buy 100 shares of XYZ Stock at $95 each. The favorable aspect of this outcome is that the premiums gained at the onset of the trade can be applied toward this obligation.
• The Stock Price is Between $105 and $110—The put option becomes null, but the in-the-money call options they sold result in a loss. This is mitigated by the premium they collect and the call option that they bought, which is now worthless.
• The Stock Price is Between $95 and $105—The trader gets to keep the whole premium because all options expire without value. This is where the stock price stays within the desired range, thus making the Jade Lizard approach profitable.

Profit and Loss Scenarios

What is the maximum profit that can be secured from the Jade Lizard strategy, and what is the worst-case scenario that you could run up against? We’ve outlined the profit and loss possibilities associated with this trade below to provide you with a clear understanding of the setup’s defined risk and profitability potential.

• Max Profit: The maximum profit on the Jade Lizard is the total credit received when the underlying asset’s price remains in that range between the put strike and the call spread’s lower strike.
• Max Loss: The maximum loss scenario occurs when the price of the underlying asset increases significantly, and it’s limited to the difference between the strike prices of the call spread, plus the premium the trader secures at the onset of the trade.

With the Jade Lizard, there is no risk to the upside (if strike selection is correct), and the downside risk only occurs if the stock falls below the short put strike. You reach a breakeven point with this strategy for both the upside and the downside.

• Breakeven on Downside—Short put strike – total credit received from the put and call spread
• Breakeven on Upside—No upper breakeven point because the net premium and the structure of the call spread protect against unlimited upside loss.

It is worth noting that the choice of expiration dates for the options contracts used by traders can significantly impact the outcome of the Jade Lizard setup. It can have ripple effects that affect the time decay potential and the profit or loss outcomes upon the expiration date.

Why It’s Called a ‘No-Loss’ Strategy (And Why That’s Misleading)

Some traders refer to the Jade Lizard as a “no loss” strategy, as the total premium collected from selling the call and put spread exceeds the width of the call spread. We want to address what is happening here to dispel the myth of no loss. This is true in some cases, but there are scenarios where the Jade Lizard can result in losses for the trader. It’s only a “no-loss strategy” if the stock price stays above the short put.

Where Losses Can Occur

If the price of the underlying asset falls below the strike price by the time of the expiration date, the investor or trader will be obligated to buy the asset at the strike price. The loss kicks in if the market price is lower than the strike price. The loss is ultimately limited to the difference between the short put strike prices and the asset’s price when the expiration date hits. Of course, you must subtract the premium received from that final number.

The Jade Lizard is notable for using a call spread in its design. There is some limited upside risk that traders can face with this strategy. It includes losses if the underlying asset prices are above the call spread’s higher strike price. Losses can really settle in if the width of the spread is not less than the premium received by the trader. The risk control used for the Jade Lizard largely depends on the position size the trader is using and their market outlook. This can be different from one trader to the next.

Ideal Market Conditions for a Jade Lizard

When is the best possible environment for using the Jade Lizard strategy? We’ve outlined them below to help you determine when they may be or may not be worth the time, money, and effort to pursue. If you find yourself with these market conditions or scenarios, you can bet money that a Jade Lizard is going to thrive.

• Neutral to Slightly Bullish Market—The Jade Lizard performs best when the trader has a market outlook that anticipates the underlying asset will remain somewhat stable. It can deliver a strong performance as well when a moderate upward trend is in place or if the market is sideways and prices are moving within a defined range.
• Low to Moderate Implied Volatility—The Jade Lizard is a strategy that benefits significantly from theta decay and a decline in implied volatility, making low to moderate volatility the perfect middle ground. High-volatility environments require more active management when it comes to risk, especially regarding the short put leg, but it’s a great starting point for traders using the Jade Lizard. If volatility begins to calm down, the trader can start making money.
• Stocks with Strong Support Near Put Strike—When the short put of the Jade Lizard is placed near the strike price where the trader is OK with owning the stock if it goes to assignment, this is one of the most ideal conditions for the strategy, provided it’s near a strong support level as well which can minimize the risk of possible downward movements.
• Avoid During Earnings or Volatile Events—Because the Jade Lizard does much better in low or moderate volatility environments, traders should avoid using this strategy when there are volatile market conditions or known events that are coming up where IV is going to spike up. We are referring to events such as earnings reports or the rollout of a controversial product. The more you can avoid using the Jade Lizard in high IV environments, the better.

Tips for Managing a Jade Lizard

Check out these tips, best practices, and helpful hints to successfully manage a Jade Lizard setup so that you can execute it with minimal problems or issues. There are four tips here that can make the process of managing a Jade Lizard a lot easier for online options traders, where they can avoid some of the common mistakes that inexperienced or newer traders might make in dealing with this strategy.

• Roll the Short Put if Stock Drops — If the underlying stock price drops, it could be a good idea to roll the short put down to a lower strike price in an attempt to keep the potential losses at bay. At the same time, you can be generating additional credit. Rolling the short put in the event of a stock drop involves closing out the existing put and opening a new short put with a lower strike price. It can be a bit complicated to maneuver and execute, but it’s well worth it to minimize potential losses.
• Take Profits Early — If the position gains value quickly, the best course of action is to take the profit early and close the trade completely before the expiration date. Traders can enjoy the advantage of receiving a significant portion of the premium collected, typically ranging from 50% to 75%. This might result in a lower profit possibility, but it’s a smart move from a risk management perspective.
• Watch Implied Volatility and Time Decay — Traders can optimize time decay in the Jade Lizard to their advantage, as this strategy benefits greatly from time decay. The shorter-term options have a faster rate of decay, so traders must choose expiration dates that are closer to the present. It is also crucial for traders to monitor time IV in the market. If there’s a scenario where IV is high but expected to go down, that is the best time to set up a Jade Lizard, as it is going to profit from a decline in IV.
• Set Alerts at Short Strikes — This is an essential step in effectively managing the risks associated with the Jade Lizard strategy. Setting up an alert when the price of the underlying falls toward or below the short put’s strike price can notify traders of the potential for being assigned shares or a loss on the books. When it comes to upside risk management, alerts can assist traders by keeping them informed about upward price movements that could impact their position.

Jade Lizard vs. Iron Condor vs. Straddle

This next section of the guide will outline the difference between the Jade Lizard and the other forms of credit spreads you might find in the options trading world. You’ll see as we dig into the comparison that the Jade Lizards have their own unique strengths and offer some interesting benefits to traders that the other two might not, and vice versa.

Let’s dive in and take a look at the Jade Lizard and two other credit spreads that are commonly used in similar, but slightly different scenarios: the iron condor and straddles (short or long).

Jade Lizard—Credit with less upside risk

• Market Outlook: Neutral to slightly bullish
• Max Profit: The net premium received
• Max Loss: The upside risk is capped, but there is undefined downside risk
• Risk Profile: The upside risk is defined, but the downside risk is unlimited (especially if the underlying asset drops in value significantly)
• Upside Risks: Traders can minimize or eliminate these risks if the credit received exceeds the width of the call spread
• Downside Risks: These risks can be considerable when the stock prices or values fall well below the strike price of the short put
• Breakeven Points: The breakeven on the downside is the short put strike minus the net premium received/the breakeven doesn’t really apply for the upside because there is no risk if the trade is set up correctly

Iron Condor—Defined risk on both sides

• Market Outlook: The Iron Condor is best used in neutral markets or when traders are expecting range-bound price movements and low volatility
• Max Profit: The net credit that the trader gets when they first enter the trade
• Max Loss: Limited and defined
• Risk Profile: The upside and downside come with defined risk and reward
• Upside Risks: Capped and defined
• Downside Risks: Capped and defined
• Breakeven Points: The lower breakeven point is the short put strike – net credit/the upper breakeven point is the short call strike + net credit

Straddle—Directional exposure with unlimited risk

• Market Outlook: Expecting the price to remain relatively stable with a regular straddle/expecting a significant price movement, but there is uncertainty about the direction with a long straddle
• Max Profit: The max profit for a long straddle is theoretically unlimited, and the max profit for a short straddle is the premium received from selling the options
• Max Loss: The max loss for a long straddle is the total premium paid, and the max loss for a short straddle is theoretically unlimited
• Risk Profile: The risk profile for a long straddle is a limited maximum loss and an unlimited maximum profit potential/the risk profile for a short straddle is limited maximum profit and an unlimited maximum loss potential
• Upside Risks: Upside risk for a long straddle is unlimited, and the upside risk for the short straddle is theoretically unlimited
• Downside Risks: Downside risk for a long straddle is limited to the premium paid, and the downside risk for a short straddle is theoretically unlimited
• Breakeven Points: The breakeven point for the long straddle comes in two forms—the strike price + total premium paid and the strike price – the total premium paid/the breakeven point for the short straddle has two forms as well—the strike price + the total premium received and the strike price – the total premium received

When NOT to Use the Jade Lizard

Now that you’re familiar with the optimal times for the Jade Lizard move, we’ll present the market conditions and scenarios where the move is less than ideal. If you find yourself in these kinds of situations, it is best not to use the Jade Lizard and focus on other strategies that are more appropriate.

• High Volatility Stocks with Big Gap Risk: High volatility can be a significant risk when it comes to the short put portion of a strategy, especially when using the Jade Lizard. The possibility of large price swings resulting from a short put position in the Jade Lizard can become highly vulnerable to losses if the stock price experiences a severe drop.
• Bearish Outlook: This strategy is typically used in market conditions that are either neutral or have a slightly bullish outlook, making it a waste of time to use the Jad Lizard in a bearish market. The Jade Lizard is designed to generate income for the trader through premiums. Still, it doesn’t offer any protections for traders against sudden drops in the value of the underlying asset.
• Traders Uncomfortable with Undefined Risk: When it comes to the downside of the Jade Lizard, there is plenty of undefined risk. It’s mainly due to the uncovered short options, where the maximum loss is theoretically unlimited. It may not be the top choice for a trading strategy for those who are uncomfortable with the idea of technically unlimited risks.
• Close to Major Events: Remember that the Jade Lizard doesn’t do so well when IV is super higher (it performs the strongest when the markets are either neutral or slightly bullish) so it is best to avoid using the Jade Lizard close to significant events like an earnings announcement or a Fed decision regarding interest rates.

Is the Jade Lizard Truly a “No-Loss” Setup?

Is the Jade Lizard a smart setup for traders, or is it an enticing “no-loss strategy” that simply gives traders a false sense of security? While it can be a safer strategy, especially in terms of being a credit spread, it is not a completely risk-free move.

There are instances where the Jade Lizard can be used, and the trader will not experience losses, specifically when the stock price remains above the short put. We have to admit that the Jade lizard is a great tool, but it obviously comes with some catches in that traders can lose money if the underlying asset prices are above the call spread’s higher strike price (and a few other instances).

Key Takeaways

• The Jade Lizard remains an enticing and attractive strategy because it offers no upside risk and a defined risk profile. Plus, it appeals to traders who have a neutral or slightly bullish outlook on the market.
• This strategy is not truly “no-loss” as many people claim. It only works like that if the stock price remains above the cost of the short put leg of the Jade Lizard.
• The Jade Lizard is a suitable strategy for confident, neutral-to-bullish traders. Anyone interested in incorporating Jade Lizards into their trading plan should practice using paper trading before using real money in a live market.
• The Jade Lizard is a strong choice for advanced credit spread users.

Try our Options Strategy Builder to test the Jade Lizard today! We also advise using a well-known, reputable options profit calculator and a trade journal to bring your Jade Lizard strategy to the next level of success.

Read Next: “Top Options Strategies for Volatile Markets“