Volatility Paradox

Overview

The Jade Lizard is a strategic masterpiece for premium sellers. It is a "skew-neutral" strategy designed to collect credit while specifically eliminating one of the biggest psychological fears of option sellers: getting "run over" by a stock that moons.

By combining a Short Put with a Bear Call Spread, you create a trade that makes money if the stock stays flat, and stays profitable even if the stock rallies to infinity.

[!TIP] The secret of the Jade Lizard is the Credit Check. You must collect more in total premium than the width of the call spread. If you do, you have zero upside risk.

The Setup

A Jade Lizard consists of:

Short Put: Sell 1 OTM Put at Strike $K_P$ .
Short Call Spread: Sell 1 OTM Call Spread at Strikes $K_1$ and $K_2$ .

Mechanics: The "Zero Risk" Upside

Scenario A (Flat): You keep the entire credit. Max profit.
Scenario B (Rally): The stock goes to $1,000. Your call spread loses money, but the total credit you collected from the put and the call spread combined covers the loss. You still walk away with a small profit.
Scenario C (Crash): This is where you lose. You are long the stock starting at Strike $K_P$ .

Payoff and Break-even

Max Profit

The total credit collected.

\text{Max Profit} = \text{Credit}_{\text{put}} + \text{Credit}_{\text{call-spread}}

Upside Profit

If the stock rallies past the call spread:

\text{Upside Profit} = \text{Total Credit} - (K_2 - K_1)

If this number is positive, you have eliminated upside risk.

Break-even Point

Only one break-even, located on the downside:

\text{Lower BE} = K_P - \text{Total Credit}

The "Bullish Skew" Greeks

Jade Lizards are delta-positive trades that love time decay.

1. Delta: Profitably Bullish

Because you have a naked short put and only a credit spread on the call side, your overall position has a positive Delta. You want the stock to stay flat or move up.

2. Theta: The Rent Collector

Like all credit strategies, Theta is your main source of income. You are "short volatility" and "long time."

3. Vega: Short Volatility

You want Implied Volatility to decrease. A "vol crush" will help you close the position early for a profit.

When to Use?

High Implied Volatility: Especially when put skew is high (puts are expensive).
Neutral-to-Bullish Outlook: You think the stock is more likely to go up than down, but you want to get paid if it stays flat.

Checklist for Entry

Is the total credit greater than the width of the call spread?
Am I comfortable owning the stock at the Put Strike price?
Is the stock liquid enough for easy adjustment if it drops?

Why 'Jade Lizard'?Read more

The name is simply a "cool name" coined by the tastytrade research team. It represents the combination of a short put and a call spread.

Variations include the Big Foot (an iron condor with no upside risk) and the Jade Lizard Ratio, but the core principle remains the same: use put premium to "pay for" your protection on the call side.

Jade Lizard