Jade Lizard
A jade lizard was a three-legged options strategy that combined a short put with a short call spread (short call plus a long OTM call), structured so that the total premium collected exceeded the width of the call spread, thereby eliminating upside risk from the position entirely.
The jade lizard was a nuanced structure designed to address a specific asymmetry in options pricing. When volatility skew caused OTM puts to be relatively expensive compared to OTM calls, a straightforward short strangle collected rich put premium but modest call premium. The jade lizard took advantage of this by replacing the naked short call with a short call spread — selling an OTM call and buying a further OTM call for protection. If the total credit collected (short put premium plus call spread net premium) exceeded the call spread width, the position had no risk on the upside regardless of how high the underlying rallied. Downside risk remained if the underlying fell sharply below the short put strike.
In Indian markets, the NSE's Nifty and Bank Nifty weekly options were the typical arena for this structure. India's volatility surface historically showed a pronounced downside skew — OTM puts on Nifty commanded significantly higher IV than OTM calls, reflecting the market's fear of sharp downside moves and the persistent demand for protective puts from institutional investors and mutual funds. This skew environment made the jade lizard structurally attractive: the short put collected a disproportionately large premium, which — when combined with the call spread premium — comfortably exceeded the call spread width, satisfying the no-upside-risk condition.
The practical construction might look like this for a Nifty expiry: sell a 21,700 put, sell a 22,200 call, and buy a 22,400 call. If the put premium was Rs 85, the short call premium was Rs 40, and the long call cost Rs 20, the net credit was Rs 105. The call spread width was 200 points. Since Rs 105 (x75 lot size) as a proportion of the spread width was less than the call spread width in premium terms — but the total credit of Rs 105 exceeded no upside loss because the call spread width was contained — the calculation had to be done in absolute rupee terms per lot to verify the no-upside-risk condition.
The jade lizard was sensitive to the level of implied volatility at entry. It was a short-volatility strategy overall, and a sudden expansion in IV after trade initiation hurt both the short put and the short call, even as the long call provided a small offset. Traders who deployed jade lizards typically did so when IV was elevated — such as in the days following a sharp market decline — expecting IV to revert while the underlying stabilised.