When we believe the stock price will rise a little, we can trade a Jade Lizard options strategy to profit from a slightly bullish outlook.
Today, we share what a Jade Lizard is, and how to find the best entry points using the Options Scanner.
What Is a Jade Lizard Options Strategy?
A Jade Lizard is a slightly bullish options strategy made up of a short Put and a Bear Call Spread. The trade is most profitable when the stock price rises a little bit.
If we believe the AMZN stock price will move up a little in the next few months, we can sell a Jade Lizard to profit from the slight bullish move:
- Trade a 0.30 delta short Put close to the market price to define the minimum stock price.
- Sell a 0.20 delta Bear Call Credit Spread to define the maximum stock price.
The trade will be profitable if AMZN rises a little. But if the stock price falls, the maximum loss is buying 100 worthless stocks from the assigned Put contract.
Key Points to Trading Jade Lizards
A Jade Lizard is made up of 3 option contracts, and it's quite similar to neutral trades like a Strangle (2 contracts) and an Iron Condor (4 contracts).
We want to enter a Jade Lizard when the option's value is high, then exit after theta and vega depreciate the option's value.
Vega is the changes to options value with respect to changes in IV.
Since we want to sell high and buy low, we need to sell to open at high IV, then buy to close when vega causes the option's value to decay at low IV.
Theta is the changes to options value with respect to changes in time.
From our experience, selling options with more than 30 days to expiration have a predictable time value decay. So we can be patient and earn a profit as time passes.
A Jade Lizard has no upside risk even when the stock price goes up a lot. This requires the premium received to be greater than the width of the Call Credit Spread. This way the trade doesn't lose even when the stock price rises beyond the Call Spread.
Gamma is the changes to delta with respect to changes in stock price. It is also the acceleration to options prices with respect to changes in stock price.
Gamma grows when the options are close to expiration, leading to big fluctuations in options value. So whether our Jade Lizard is profitable or not, we prefer to close the trade or roll it to the next month before 14 days to expiration, to reduce gamma risks.
We also use fundamental analysis to choose Jade Lizard stocks with Fair Values greater than the market prices, to give us more confidence in a bullish outlook.
Best Options Scanner Settings for Jade Lizards
Options Scanner is designed to find high probability and high return short neutral options in seconds. Here are some tips for using the filter function to find the best Jade Lizard entry points:
- We want to choose opportunities with greater than 30 DTE to get the safest theta decay and less gamma.
- We can filter IV Perc >67% to find opportunities that have a high chance of contracting IV and vega in our favour.
- We should also avoid underlying that have an upcoming Earnings Date in 30 days to reduce the chance of large fluctuations.
Finally, since Jade Lizards have similar properties to Strangles, we sort the Strangles ROC by descending order to get ideas for high-return Jade Lizard trades.
Best Jade Lizard Opportunities Right Now
The filtered list shows that ROKU's $133.70 Fair Value is higher than the current market price. It also has a 97% IV Percentile that has a high chance of reducing IV in the future.
So ROKU fits the bullish and high IV criteria that make it a good choice for Jade Lizard options:
- Sell a Put at 0.40 delta.
- Sell a $130 Call Spread near the Fair Value.
This Jade Lizard uses $1,670 in buying power, and receives $620 in premium that is larger than the width of the Call Spread. This way the Jade Lizard will not lose money even if the stock price explodes in value.
If ROKU's stock price remains between $75 and $130 before expiration, the trade has a maximum return of 37%.
Now you know how to use the Options Scanner to filter the best Jade Lizard entry points. Remember to use the scanner often to find high-return slightly bullish trades to sell, and profit from a small rise in prices.