Every Jade Lizard Width They Tested Was Profitable. 3 Years of S&P Data.

Key Concepts

• Jade Lizard: An options strategy consisting of a short put spread and a short naked call (or a wide call spread), designed to collect a credit that covers the width of the call spread, effectively eliminating upside risk.
• Expected Move: A statistical projection of the range an underlying asset's price is expected to trade within over a specific timeframe, based on implied volatility.
• Short-Term Options: Options with a short duration to expiration (in this study, 7 days).
• Credit Requirement: The core rule of the Jade Lizard where the total credit received must be at least equal to the width of the call spread.
• Skewed Iron Fly: A variation of an iron fly where the put spread and call spread widths are asymmetrical, often used to adjust risk/reward profiles.

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1. Study Overview and Parameters

The study analyzed over three years of data on short-term (7-day) S&P 500 options to determine the optimal strike placement and spread widths for Jade Lizards.

• Methodology: Unlike traditional studies using Delta, this research used multiples of the expected move (ranging from 0.25x to 1.5x) to determine strike placement.
• Trade Criteria: A trade was only considered "valid" if the credit received at order entry was at least equal to the width of the call spread.
• Management: Trades were monitored at the end of each trading day, and every 10 minutes on the day of expiration. Winners were closed at 25% of the maximum profit.

2. Performance Analysis by Configuration

The study tested various combinations of put and call spread widths:

• $20 Wide Puts / $5 Wide Calls: Performed best when strikes were placed at the expected move or further (1.25x–1.5x). At-the-money placements functioned similarly to a skewed iron fly.
• $20 Wide Puts / $10 Wide Calls: Required tighter strike placement to meet the credit requirement. While viable, it was harder to cover the call spread width as the strikes moved further out of the money.
• $30 Wide Puts / $10 Wide Calls: Identified as a high-performing configuration, yielding an average P&L of approximately $100/day. This setup showed higher "fillability" because the wider put spread generated more premium, making it easier to satisfy the credit requirement.

3. Key Arguments and Findings

• Upside Risk Mitigation: The primary advantage of the Jade Lizard is the elimination of upside risk. The presenters noted that in a volatile yet bullish market, this structure is highly effective.
• The "Overage" Factor: When the credit received significantly exceeds the width of the call spread (the "overage"), the trade becomes safer and more profitable. This allows for lower risk-to-reward ratios.
• Strike Placement Strategy: While the study showed that further out-of-the-money placements generally performed better, the presenters argued that at-the-money placements are also viable if the credit received is large enough to mitigate the risk of the underlying asset moving against the position.

4. Notable Quotes

• "The jade lizard's defining credit requirement, collecting at least the call spread width, means that there's a natural limit to how far out of the money the short strikes can be placed."
• "Every combination we tested showed positive average P&L, but that doesn't mean all approaches are equal."
• "I hang my hat on expected move. I use that bar for everything." (Regarding the use of expected move as a primary metric for strike selection).

5. Real-World Application

The presenters demonstrated the strategy by placing a live trade in their account:

• Setup: A 7-day Jade Lizard with a $20-wide put spread and a $10-wide call spread.
• Execution: They targeted the expected move for strike placement.
• Rationale: By collecting a substantial credit ($1,320), they mitigated risk. Even if the market moves significantly higher, the trade remains profitable because the upside risk is capped by the call spread. They set a GTC (Good 'Til Canceled) order to close the position at 25% of the max profit.

Synthesis and Conclusion

The study confirms that the Jade Lizard is a robust strategy for short-term options trading, provided the trader adheres to the discipline of ensuring the credit received covers the call spread width. While wider put spreads (e.g., $30 wide) offer better premium collection and higher average P&L, the choice of width and strike placement should ultimately depend on the trader's risk tolerance and current market volatility. The "expected move" serves as a reliable baseline for strike selection, offering a balance between probability of profit and risk management.