Jade Lizard in BA

Key Concepts

• Volatility: The degree of variation of a trading price series over time, measured by the standard deviation of logarithmic returns.
• Forward/VX: A futures contract on the Cboe Volatility Index (VIX), often used as a proxy for expected market volatility.
• IV Rank: Implied Volatility Rank, a measure that compares the current implied volatility of an asset to its historical range over a specific period. A low IV rank suggests that implied volatility is relatively low compared to its historical levels.
• Directional Trade: A trading strategy that aims to profit from a specific price movement (up or down) in an underlying asset.
• Jade Lizard: A defined-risk options strategy that involves selling an out-of-the-money (OTM) put and selling an OTM call spread. It is typically used when a trader is neutral to slightly bullish on an underlying asset and expects low volatility.
• Out-of-the-Money (OTM) Put: An option contract where the strike price is below the current market price of the underlying asset.
• At-the-Money (ATM) Put: An option contract where the strike price is equal to or very close to the current market price of the underlying asset.
• Premium: The price of an option contract.
• Bullish Delta: A measure of how much an option's price is expected to change for a $1 change in the underlying asset's price, indicating a positive correlation.
• Call Spread: An options strategy that involves buying one call option and selling another call option with a different strike price but the same expiration date.
• Defined Risk: A trading strategy where the maximum potential loss is known in advance.
• Strike Price: The price at which an option contract can be exercised.
• Expected Move: The anticipated price range of an underlying asset over a specific period, often derived from option premiums.
• Break-even Point: The price at which a trade neither makes nor loses money.
• Gap: A significant price difference between the closing price of one trading period and the opening price of the next.
• Tasty Trade: A brokerage firm that offers trading platforms and educational resources.

Market Overview and Volatility

The market experienced significant volatility, with the S&P 500 showing a substantial intraday move of over 120 handles, though it later pared back gains to around 50 handles. This follows a period of back-and-forth trading, suggesting a return of volatility after a brief period of perceived stability. The Forward/VX (a measure of expected volatility) has decreased by 13 cents, falling from levels below 19-20 to flirt with $20-$21.75. This indicates a decrease in implied volatility, which is a key factor for the discussed options strategy.

Trade Strategy: Jade Lizard on Boeing

The speaker identifies a stock, implied to be Boeing, that has experienced a consistent downward trend with low implied volatility (low IV rank). This low IV rank signals an opportunity to implement a directional trade. The chosen strategy is a "Jade Lizard."

Rationale for Jade Lizard:

• Low IV Rank: Favors directional trades as implied volatility is not expected to expand significantly.
• Directional Bias: The strategy is designed to profit from a specific price movement.

Jade Lizard Components and Execution:

1. Selling an Out-of-the-Money (OTM) Put: The initial thought was to sell an OTM put to gain bullish delta. However, the premium on the ATM OTM put was considered "too rich" due to its proximity to the money, resulting in a bullish delta of 40.
2. Selling an 85-95 Call Spread: To manage risk and define the trade, the speaker opts to sell the 85-95 call spread. This involves selling the 85 call and buying the 95 call.
   • Trade Execution: The speaker executed this trade earlier in the day at $10.96, selling the 180s and 85-95 calls. (Note: There's a slight discrepancy in the transcript regarding the specific strikes sold initially, but the focus shifts to the 85-95 call spread).
   • Current Trade Price: At the time of recording, the 85-95 call spread was trading at $10.72, indicating a higher price than when the trade was initiated.
   • Stock Movement and Trade Impact: The stock had moved down $2 since the trade was initiated. When the trade was placed, the stock was only down $1. A $1 move in the stock resulted in a P&L change of approximately 24-25 cents for the trade, aligning with the trade's delta of 24. This demonstrates the sensitivity of the trade to stock price movements.
   • Delta: The delta of the overall trade is 24, meaning for every $1 move in the underlying stock, the trade's value is expected to change by approximately 24 cents, all else being equal.
   • Risk Profile:
     • Upside: The trade has defined risk to the upside due to the purchased 95 call.
     • Downside: The trade has long delta, meaning it loses money as the stock price continues to fall.
   • Market Makers and Fills: The bid-ask spread for these options is around 15 cents, and traders typically get filled 5-10 cents under the mid-price.
   • Profitability: As a standalone trade (referring to the call spread), selling the 85 call and buying the 95 call collects over one-third the width of the strikes ($10 width), implying a probability of profit of approximately 60%. This suggests it could be a suitable trade for a bearish outlook.
   • Bullish Perspective: For a bullish trader, this strategy allows for collecting additional credit as the stock price moves lower.

Trade Break-even and Potential Downside

• Break-even Point: The break-even point for this trade is just under $170, approximately $169 and change.
• Historical Context: This break-even level aligns with a price gap the stock experienced in April. The speaker questions if the stock could reach this level within the next 47 days.
• Expected Move: The expected move for the stock is $15. The downside risk is under $170, which is close to the expected move.

Conclusion and Market Commentary

The speaker concludes by summarizing the trade as their "trade for today." They highlight the current market environment as one with significant volatility and two-sided action, where both bulls and bears can profit, while "pigs are getting slaughtered" (a colloquialism for traders who are consistently losing money). The speaker also promotes Tasty Trade as a platform where individuals can trade and encourages viewers to sign up for "the works" and take advantage of promotional offers for moving accounts.