October 5, by Sage Anderson. Today on the blog we are highlighting an episode from a series geared toward newer investors in the equity derivatives space. Liz and Jenny, the hosts of Know Your Optionsrecently featured two strategies the tastytrade network has dubbed trade " jade lizard " and "big lizard. These closely related strategies involve combining three different option positions in the same symbol and expiration month with the intention of maximizing reward and minimizing risk.
In options trading, a straddle is defined as buying or selling an lizard number of calls and puts of the same strike price in the same expiration month. A strangle possesses an almost identical risk profile as a straddleexcept that it widens out the breakeven points while producing a lower maximum profit. In this case, a strangle is initiated by selling the out-of-the-money call and put in the same expiration month.
If the SPY closes anywhere within those two points before expiration, the position will produce a profit. A big lizard involves selling a straddle then purchasing an out-of-the-money call. A jade lizard involves selling a strangle and then also purchasing an out-of-the-money call.
The long premium option reduces the overall credit maximum profit of the position, but reduces risk in the position if the underlying moves beyond the upside breakeven threshold. The "big" lizard gets its name due to the fact that a straddle sale yields a bigger credit versus the strangle in a "jade" lizard.
As noted in the slide above, the goal is to try and execute this spread such that the absolute credit from the three-pronged position produces a value larger than the difference between the strike prices of the call positions. On Know Your OptionsLiz and Jenny discuss the fact that recent downward moves in the SPY have pushed up premiums and now may offer good entry points for just this type of position - especially if a trader is neutral to bullish the market over the duration of the trade typically 45 days to expiration.
As you can see, lizards reduce upside risk in straddles and strangles, and benefit the most when an underlying sits still or drifts toward the strike.
The trade will generally produce the most profit in non-bearish and high implied volatility environments. We encourage you to watch the entire episode of Know Your Options to get the best possible understanding of lizards. Additionally, you can find a great deal of additional tastytrade material on jade lizards or big lizards on tastytrade.
Trade invite option to join the tastytrade team for an extended discussion on this important topic. Using different products to hedge positional risk is an advanced concept in equity options trading. With many indice back near week highs and some volatility products trending lower, the tastytrade team brings some insights to consider for the current market environment.
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Dec 9, Liz and JNYRollingBest PracticesKnow Your OptionsRolling covered calls Sage Anderson Comment. Why Traders Roll Trade Know Your Options. Dec 3, Closing the GapSage AndersonDeltaHedgingOption SosnoffTony BattistaMike Hart Sage Anderson Comment. Cross-Product Hedging Closing the Gap. Dec 1, Market MeasuresOptions JiveSage Andersontom sosnoffLizard Battistatastytrade live Sage Anderson Comment. None of tastytrade or its personnel gives investment or financial advice or makes investment recommendations.
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