By Viraj Bhagat
Newer technologies, better software, improvements in connectivity, etc. happening at a tremendous pace has led to a boom in the way knowledge is shared and accessed. Trading has always maintained the front seat position for primary advantage and the same goes for trading strategies. Every trading strategy can't give you the same outcome, and it is also true that neither can assure consistent returns for longer durations. To stay up in the game, one has to keep learning, evolving and making their strategy even better. Options were created to help manage the risk better. Options trading strategies are widely practised today and produce various results under various conditions. Some of the well-known strategies are:
- Straddle Options Trading Strategy: Buy or sell an equal number of calls and puts that have the same expiry and same strike price
- Strangle Options Trading Strategy: Similar risk profile as a Straddle; widens the breakeven points and produces lower max. Profit and lower loss
We've all read about trading strategies like Iron Condor, Butterfly Spread, Bear Call Ladder, and many others. But, there is one strategy in particular according to me which offers good results during high implied volatility, and that is Jade Lizard. But before we go to Jade Lizard, let us understand the meaning of Lizards in Trading.
What Are Lizards In Trading?
Lizards are a type of Options Trading Strategy which is practised by Traders to gain profit from their trades
- In case of Straddles and Strangles, Lizards reduce the upside risk
- They are most beneficial when underlying stays or drifts toward the strike
- High profits are produced in high IV and non-bearish environments
Jade Lizard Options Trading Strategy
It is a neutral or bullish custom option trading strategy which is specific in nature.
- It includes a Short Put and a Short Call Spread
- Since it consists of a Short Call Spread it is slightly Bullish
- It does not have an upside risk
- It takes advantage of high volatility on the put and call premiums
- Executed in a way that: The value produced by complete credit (from the 3-pronged position) > Difference between the Call position Strike Prices
When To Practise Jade Lizard?
A Jade Lizard Trading Strategy is generally practised if there was a high IV and /or if the stock had recently fallen i.e the stocks are oversold.
Components Of A Jade Lizard Trading Strategy
It consists of:
- A Bear Vertical Spread using Call Option, and
- Put Option sold at Strike Price Lower than the Strike Price of the Call Options
In a Jade Lizard Options Trading Strategy, we Sell a Short Put and Sell a Short Call Credit Spread (Ensure that Total Credit received > Width of the spread) given the condition that the underlying should not move much. Here, the premium collected is greater than the width of the strikes of the Call Spread The Jade Lizard would look something like this:
Setup Of A Jade Lizard Strategy
Profit: Profit here is the credit received from the opening trade Max. Profit: Underlying expires between the short put and short call of the spread. Loss: If credit is lesser than the width of the Call spread, and there is upwards movement Steps:
- Step 1 - Buy a Call Option at 1 Strike Price
- Step 2 - Sell a Call Option at Strike Price lower than the strike price of the Call Option bought in step 1
- Step 3 - Sell an OTM Put Option at Strike Price lower than both the above Call Options
Note: In case OTM Puts are bought, the Lizard will face the opposite direction
In short: Jade Lizard = Sell Strangle + Buy OTM Call Here, the trades for the credit is larger than the width of the Call Strikes
Caution: Remember! Don’t confuse Jade Lizard with Big Lizard Strategy where, Big Lizard = Sell Straddle + Buy OTM call
- Richness: Naked Put Trades > Naked Call Trades
- Richness (In Premium): Short Call Spreads > Short Put Spreads
Difference Between Big Lizard Trading Strategy And Jade Lizard Trading Strategy
- Big Lizard Trading Strategy and Jade Lizard are very similar to straddle and strangle
- The only difference is that to mitigate the risk they layer on one more option position
- They are closely related strategies
- In both strategies, 3 different options positions having the same expiration month are combined
- The intention of practising both of these strategies is to maximize the reward and minimize the risk
Big Lizard = Sell Straddle + Buy OTM Call
Jade Lizard = Sell Strangle + Buy OTM Call
Example Of A Jade Lizard Strategy
Consider an example of ABC Company. The setup for Jade Lizard would be as follows:
Thus, Net Credit = 1 OTM Put + 1 OTM Call - 1 OTM Call Net Credit = 10+20-15 Net Credit = 15 In total, we receive a net credit of INR 15 Breakeven = Short put strike - Credit received Breakeven = 575-15 Breakeven = 560 In our case, therefore, break-even will be at a 5.47% down-move from the current spot price.
Note: - Strike Selection and impact of Volatility - Short put profit should be around 70% and the call spread profit around 30% - If the call spread is ITM, we have to buy it back
Implementing The Jade Lizard Options Strategy
I will use Tech Mahindra (Ticker – NSE: TechM) option for this example. Last 1-month stock price movement (Source – Google Finance) There has been quite some movement in the stock price of Tech Mahindra Ltd., the highest being 702 and lowest being 652.95 in last 1 month. For the purpose of this example; I will sell 1 out of the money Put, sell 1 out of the money Call and buy 1 out of the money Call Options. Here is the option chain of TechM for the expiry date of 31st May 2018 from nseindia.com Ideally, the following should be the Payoff for this Jade Lizard Trading Strategy.
Calculate The Jade Lizard Options Strategy Payoff In Python
Now, let me take you through the Payoff chart using the Python programming code.
import numpy as np import matplotlib.pyplot as plt
def call_payoff(sT, strike_price, premium): return np.where(sT > strike_price, sT - strike_price, 0) - premium # TECHM Stock price spot_price = 688 # Long call strike_price_long_call = 750 premium_long_call = 4.30 # Short call strike_price_short_call = 730 premium_short_call = 6.80 # Stock price range at expiration of the call sT = np.arange(0.9*spot_price,1.1*spot_price,1) payoff_long_call = call_payoff(sT, strike_price_long_call, premium_long_call) fig, ax = plt.subplots() ax.spines['bottom'].set_position('zero') ax.plot(sT,payoff_long_call,label='Long Strike Call',color='g') plt.xlabel('Stock Price') plt.ylabel('Profit and Loss') plt.legend() plt.show()
payoff_short_call = call_payoff(sT, strike_price_short_call, premium_short_call) * -1.0 fig, ax = plt.subplots() ax.spines['bottom'].set_position('zero') ax.plot(sT,payoff_short_call,label='Short Strike Call',color='r') plt.xlabel('Stock Price') plt.ylabel('Profit and Loss') plt.legend() plt.show()
def put_payoff(sT, strike_price, premium): return np.where(sT < strike_price, strike_price - sT, 0) - premium # stock price spot_price = 688 # Short put strike_price_short_put = 660 premium_short_put = 7.85 # Stock price range at expiration of the put sT = np.arange(0.9*spot_price,1.1*spot_price,1) payoff_short_put = put_payoff(sT, strike_price_short_put, premium_short_put) * -1.0 fig, ax = plt.subplots() ax.spines['bottom'].set_position('zero') ax.plot(sT,payoff_short_put,label='Short Strike Put',color='m') plt.xlabel('Stock Price') plt.ylabel('Profit and Loss') plt.legend() plt.grid() plt.show()
Jade Lizard Payoff
payoff = payoff_long_call + payoff_short_call + payoff_short_put fig, ax = plt.subplots() ax.spines['bottom'].set_position('zero') ax.plot(sT,payoff_long_call,'--',label='Long Strike Call',color='g') ax.plot(sT,payoff_short_call,'--',label='Short Strike Call',color='r') ax.plot(sT,payoff_short_put,'--',label='Short Strike Put',color='m') ax.plot(sT,payoff,label='Jade Lizard Payoff') plt.xlabel('Stock Price') plt.ylabel('Profit and Loss') plt.legend() plt.grid() plt.show()
Jade Lizard Formation
payoff = payoff_long_call + payoff_short_call + payoff_short_put fig, ax = plt.subplots() ax.spines['bottom'].set_position('zero') ax.plot(sT,payoff,label='Jade Lizard Payoff') plt.xlabel('Stock Price') plt.ylabel('Profit and Loss') plt.legend() plt.grid() plt.show()
profit = max(payoff) loss = min(payoff) print (profit) print (loss)
Max. Profit: 10.35 Max. Loss: -30.45
From the above plot, for Jade Lizard Options Strategy Max. Profit and Max. Loss can be observed. In this article we have covered all the elements of Jade Lizard Trading Strategy using a live market example and by understanding how the strategy can be calculated in Python. The payoff can also be calculated with the help of the Excel sheet that I have provided as a downloadable file along with the Python Code.
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Download Data File
- Jade Lizard Options Strategy - Python Code
- Jade Lizard Payoff Calculation - Excel Sheet