Hello friends, I hope you are doing good. I’m trying to share one options strategy every week. Today I’m sharing the Reverse Jade Lizard option strategy in LT.
In this post, I’m sharing What is Reverse Jade Lizard Option strategy? How can we deploy this? and what should be our adjustments in this Option strategy?
What is Reverse Jade Lizard Option Strategy?
If you are looking for a way to profit from a stock that is expected to move significantly in either direction, you might want to consider the reverse jade lizard option strategy. This is a combination of a short put spread and a naked call that can generate income and reduce risk in volatile markets.
The reverse jade lizard option strategy involves selling a put spread (a short put and a long put with a lower strike price) and selling a call with a strike price higher than the short put. The goal is to collect more premium from selling the options than the maximum loss of the put spread. This way, you can create a position that has no risk to the downside and limited risk to the upside.
The reverse jade lizard option strategy is suitable for stocks that have high implied volatility and are expected to make large moves in downside direction. The strategy can benefit from a decrease in volatility after the trade is placed, as well as from time decay of the options. The strategy can also be adjusted by rolling the options to different expiration dates or strike prices, depending on the market conditions and the trader’s outlook.
The main advantage of the reverse jade lizard option strategy is that it can generate income and reduce risk in volatile markets. The strategy can also be profitable in a range of scenarios, as long as the stock price does not move beyond the breakeven points. The breakeven points are calculated by adding or subtracting the net credit received from selling the options to the strike prices of the short call and the short put.
The main disadvantage of the reverse jade lizard option strategy is that it involves selling naked calls, which can expose the trader to unlimited risk if the stock price rises significantly below the put strike price. The trader might be forced to buy the stock at a higher price than the market value, or close the position at a loss. The strategy also requires a high level of trading experience and margin requirements, as well as constant monitoring of the stock price and the option prices.
The reverse jade lizard option strategy is an advanced option strategy that can be used to generate income and reduce risk in volatile markets, but it also involves high risk and high complexity. Therefore, traders should only use this strategy if they are familiar with options trading and have a clear understanding of the risks and rewards involved.
This options strategy has three legs. We are selling deep OTM Call + Put and hedging our downside risk with one bought Put. All legs have equal lot sizes. This strategy is Reverse Jade Lizard Strategy. Look at the payoff chart:
This strategy is a credit strategy and is always good when we are expecting a range-bound activity in the script. As you can see it has an Unlimited risk on the upside, so this strategy is only suitable for Advanced option traders who can manage it properly.
Let us take the example of LT to understand step by step process I’m following to initiate this strategy.
Steps to follow for the Reverse Jade Lizard option strategy
To initiate the Reverse Jade Lizard option strategy is: Find a stock that is trading in a range after a good upside movement. You can see after a good upside movement; LT is trading in a range with a neutral trend. 2300 – 2400 is the resistance range we can see on the charts. So, LT is a good script based on the first parameter.
Open Interest analysis for LT
Now look at Open interest data; Highest OI stands at 2100 PE and 2300 CE. So, this can be our range. The almost same range we are getting on the charts. So, it’s our double confirmation that this range is valid based on current option chain data.
Reverse Jade Lizard option strategy in LT
Based on the range we find in LT, we are selling 2100 PE & 2300 CE and managing downside risk; we are buying 2080 PE. Now you can see that we don’t have any risk on downside risk. But we have unlimited risk on Upside.
So, to manage that risk you have to follow some adjustments if you find that LT is approaching your sold 2300 Call option.
Once you find that script is approaching your sold call strike means 2300, you can buy 2320 CE to lock your unlimited upside loss. You can bring your sold PUT to a higher level to collect some extra premium.
Now when do you have to make this adjustment? only if you find LT above 2260.
You can join our Options Strategies – A Mentorship program to learn some of these adjustments in a practical way.
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Must check these also:
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DISCLAIMER: – we are not a SEBI research analyst. Views posted here only for educational purposes. There is no liability whatsoever for any loss arising from the use of this product or its contents. This product is not a recommendation to buy or sell, but rather a guideline to interpreting specified analysis methods. This information should only be used by investors and traders who are aware of the risk inherent in securities trading.