The Jade Lizard
Sell a put and a call spread for more than the spread is wide, and a rally cannot cost you money.
Four things to keep in mind about a jade lizard.
The credit is the premium from the put and the call you sell, minus the premium for the call you buy.
Buying the higher call caps the loss above it at the width of the call spread.
At expiration you keep the whole credit anywhere between the put strike and the lower call strike.
When the credit is larger than the call spread is wide, no rally can cost you money; the risk sits below the put.
An options strategy with three legs on the same stock and expiration: sell a put below the share price, sell a call above it, and buy a call at a still higher strike. It is built so that the credit collected is larger than the gap between the two call strikes.
Subtract the credit from the put strike. In the worked example, $95 minus $3.54 gives $91.46. When the credit is larger than the call spread is wide, there is no breakeven on the upside, because the trade cannot lose money there.
Above the higher call strike, the call spread costs exactly its width. If the credit is larger, you keep the difference however far the stock rises: $3.54 minus $3 leaves $0.54 in the example. If the credit is smaller, a big rally loses money.
It comes from the sold put. If the stock fell to zero, the loss would be the put strike minus the credit, $91.46 a share in the example. The loss grows a dollar for every dollar the stock falls below the breakeven.
A short strangle sells the same put and call but buys nothing. It collects more, $5.60 in the example, so its downside breakeven is lower, but its loss above the upper breakeven has no limit. The jade lizard pays for a higher call to remove that risk.
Our Stock Options course covers calls and puts, spreads, straddles and strangles, and payoff and profit diagrams, along with the Greeks and implied volatility, in video lessons with quizzes.