Definition
Jade Lizard
A jade lizard sells an out-of-the-money put and an out-of-the-money call spread, structured so there is no upside risk.
It combines a short put with a short call spread, sized so the total premium collected exceeds the width of the call spread — eliminating risk on the upside entirely. The only risk is to the downside if the underlying falls below the short put strike. It profits in a neutral-to-mildly-bullish market.
Indian option sellers use the jade lizard on stocks and indices when implied volatility is elevated and they want to harvest premium without capping a rally's risk. It works best when the put skew is rich, letting the short put collect a fat premium relative to the call spread.
Related terms
- Bear Call SpreadA bear call spread sells a lower-strike call and buys a higher-strike call to earn premium with a mildly bearish view.
- Short StrangleA short strangle sells an out-of-the-money call and an out-of-the-money put to earn premium in a quiet market.
- Options SkewOptions skew is the pattern of implied volatility differing across strike prices, usually higher for out-of-the-money puts.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.