The Jade Lizard - One of the Most Underrated Strategies in Options Trading

Why Take on Unnecessary Risk When the Market Will Pay You to Avoid It?

If there’s one thing options traders love more than a clever name, it’s a strategy that bends the risk-reward equation in their favor. The Jade Lizard is precisely that—an elegant, overlooked strategy that does something most traders believe to be impossible: It eliminates upside risk while keeping downside exposure under control.

Options trading is littered with paradoxes. The more certain you are, the more danger you invite. The higher the probability of profit, the smaller your expected return. The Jade Lizard defies these market truisms by offering an attractive balance: limited downside, no upside risk, and positive theta. Yet, despite its remarkable efficiency, it remains one of the most underutilized tools in an options trader’s arsenal.

Let’s break it down.

What Is a Jade Lizard?

A Jade Lizard is a directionally neutral to slightly bullish strategy that involves selling a short put and a call spread on the same underlying asset. The key to its construction is collecting enough credit so that the strategy has no risk to the upside.

Here’s how to build one:

1. Sell an Out-of-the-Money (OTM) Put

2. Sell an Out-of-the-Money (OTM) Call Spread (short one call, long another at a higher strike)

3. Ensure Total Credit Received Is Greater Than the Width of the Call Spread

By structuring the trade this way, even if the underlying moves beyond your short call strike, the credit you collected upfront offsets the loss from the call spread, preventing upside risk entirely.

Let’s use an example.

Anatomy of a Jade Lizard Trade

Imagine SPY is trading at $600.

• Sell the April 4, 2025 568 Put for $3.85

• Sell the April 4, 2025 619 Call for $3.10

• Buy the April 4, 2025 624 Call for $1.95

• Total Credit Collected: $3.85 + ($3.10-$1.95) = $5.00

Now, let’s analyze the risk-reward profile.

• No Risk to the Upside: If SPY rallies beyond $619, the call spread loses $5.00 ($624 - $619), but since you collected $5.00 in premium, your maximum loss is only $0.

• Downside Risk Defined: Below $568, you start facing losses on the short put, but with an extra $5.00 cushion from the credit received. Your breakeven is actually at $563 ($568 - $563).

There is only a 17% chance that SPY will close, at expiration, below the 563 strike price. Moreover, the 563 strike is outside of the expected move

In other words, unless the underlying craters, this setup thrives.

Why the Jade Lizard Works So Well

1. Eliminates One Side of Risk (the Smart Way)

Most options traders spend their careers trying to avoid risk in the most inefficient way possible—by hedging too much or picking the wrong trade structure. The Jade Lizard sidesteps this entirely by ensuring that the credit collected negates the worst-case scenario on the upside.

This is critical because most traders overpay for call spreads. By selling the call spread instead of outright shorting a call, we reduce assignment risk while still benefitting from a directional move.

2. Takes Advantage of Skew (the Hidden Edge in Options Pricing)

If you’ve ever wondered why this strategy works so well, the answer is volatility skew.

Most options chains are priced inefficiently—especially in stocks that traders love to buy (like SPY, AAPL, TSLA and many others). Put options are usually more expensive than equidistant call options, meaning you can sell premium in a way that pays you disproportionately.

The Jade Lizard exploits this by selling a high-volatility put while simultaneously collecting call premium, ensuring an edge in markets where retail traders overpay for upside speculation.

3. High Probability of Profit, Without Being Directionally Dependent

Many traders mistake the Jade Lizard for a directional trade—it’s not. While it benefits from neutral to bullish movement, its real magic comes from the fact that it only needs one of two things to happen:

1. The stock moves sideways (you collect all the premium).

2. The stock moves up (you still win, as long as the credit received is greater than the call spread width).

By shifting the risk-reward dynamic in your favor, the Jade Lizard offers one of the best ways to structure short premium trades in volatile markets.

When to Use the Jade Lizard

The strategy works best when:

✔️ Implied volatility is elevated (IV Rank > 30)
✔️ The stock has a strong put skew (puts are more expensive than calls)
✔️ You expect a neutral to slightly bullish move
✔️ You want to eliminate assignment risk on the call side

Avoid it when:

❌ IV is low (low premiums = low edge)
❌ The underlying is near a major resistance zone (potential breakout)
❌ Earnings are approaching (vol crush can work against you)

Common Mistakes to Avoid

1. Not Collecting Enough Credit – If your total credit doesn’t exceed the width of the call spread, you will have upside risk. This is the #1 mistake traders make when constructing a Jade Lizard.

2. Choosing the Wrong Underlying – This works best in stocks with skewed volatility pricing. Avoid underlyings where calls are expensive relative to puts.

3. Overlooking Assignment Risk – If you trade this on cash-settled indexes (like SPX), you eliminate early assignment risk. If using equities, you should be aware of potential short put assignments.

Final Thoughts: A Strategy Every Options Trader Should Know

The Jade Lizard is not a get-rich-quick strategy, nor is it a silver bullet. It is, however, one of the most intelligent ways to sell premium while managing directional exposure efficiently.

What makes it so powerful is its ability to reduce one side of risk without giving up too much on the other. Unlike an iron condor or a traditional credit spread, the Jade Lizard shifts the odds in your favor using market inefficiencies—not just hope.

Yet, most traders ignore it because they’ve been conditioned to trade the same cookie-cutter strategies that brokers and educators push.

The market is filled with traders who fight unnecessary battles—overhedging, overtrading, and overcomplicating. The Jade Lizard offers something rare: a strategy that works in volatile conditions, doesn’t rely on perfect timing, and punishes the market’s mispricing.

Maybe it’s time more traders start using it.

Trade thoughtfully,

Andy

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