Jade Lizard on NOW: $6 Credit with Zero Upside Risk

Key Concepts

• Software-as-a-Service (SaaS) Stocks: Cloud-based software companies (e.g., CRM, ServiceNow) that have recently experienced significant market volatility.
• Diagonal Spread: An options strategy involving the purchase of a long-term option and the sale of a short-term option with a different strike price.
• Jade Lizard: A neutral-to-bullish options strategy consisting of a short out-of-the-money (OTM) put and a short OTM call spread, designed to collect premium with no upside risk.
• Delta: A measure of an option's price sensitivity to changes in the underlying asset's price.
• P50: The probability of reaching 50% of the maximum profit.

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Market Context: SaaS Sector Volatility

The SaaS sector, including cybersecurity firms and major CRM providers like Salesforce (CRM) and ServiceNow (NOW), has faced significant downward pressure in recent weeks. The speakers suggest that while these stocks have been "whacked," there may be an opportunity for a rebound as earnings reports approach between April and early May.

Trading Strategy 1: IGV Diagonal Spread

For traders seeking a diversified approach to the software sector, the IGV (iShares Expanded Tech-Software Sector ETF) is presented as a viable vehicle.

• Methodology: A diagonal spread expiring in June.
• Execution: Buy a June $75 call and sell a May $80 call against it.
• Rationale: This strategy is directionally bullish but benefits from premium decay (theta) on the short-term May option. It allows the trader to be wrong initially while waiting for the sector to recover, as it does not require an immediate move in the underlying price.

Trading Strategy 2: ServiceNow (NOW) Jade Lizard

ServiceNow has seen a recent 6% gain (a $5 move to $88), prompting a more cautious, income-focused approach rather than a simple naked put.

• The Trade: A Jade Lizard strategy with 32 days until expiration (May cycle).
• Execution:
  • Sell a $90/$95 call spread (short delta).
  • Sell an $80 put (long delta).
• Technical Metrics:
  • Net Delta: The position results in a net long delta of approximately 19.
  • Credit: The trader collects roughly $6 in premium.
  • Risk Profile: The strategy carries no risk to the upside.
  • Probability: The trade offers a 75% probability of success and a P50 (probability of 50% profit) of over 55%.
• Timing: The speaker notes that for single-contract traders, it may be prudent to wait until earnings (April 22nd) are closer, or to scale into the position if the stock price drops further before the earnings date.

Synthesis and Conclusion

The speakers argue that the recent sell-off in SaaS stocks may have created a bottoming opportunity. Rather than taking outright long positions, they advocate for defined-risk, income-generating options strategies. By utilizing diagonal spreads for sector-wide exposure and Jade Lizards for individual stocks like ServiceNow, traders can capitalize on volatility and premium collection while maintaining a bullish bias heading into the earnings season. The core takeaway is to manage risk through credit-collecting strategies that provide a buffer against immediate market fluctuations.