Using Options to Set Up Huge Profitability Ranges in SPY with Jade Lizard Strategy



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Many of you reading this have probably never sold or traded an option in your entire investing tenure. And most probably are still fighting the dogma you have been force fed about options being weapons of mass destruction. Or that options are much more risky than stock. Or that options are purely for speculation and offer huge amounts of leverage.

When in fact the original creation of the options market was for that of risk transfer and mitigation. Meaning you can and in my opinion should be using options to reduce your risk in the financial markets. My favorite two strategies for beginners are the short cash secured put and the covered call (link to a guest post I wrote for Financial Samurai). You can also read about a post I wrote on the covered call here. The reason I love these two strategies is that they give you the ability to reduce your cost basis, increase your probability of profit, and give you more than one way to profit.

There is another type of option selling combination that I am very fond of in higher volatility environments. I actually wrote about this for the first time here. Until recently I didn’t really have a name for this strategy. But recently I saw the guys over at TastyTrade calling this a “Jade Lizard.” A Jade Lizard is an option strategy established by combining a short call spread with the sale of a naked put.

The reason I love this strategy is due to the fact that it is neither bullish nor bearish, but instead creates a huge range of profitability, while at the same time giving you zero to very little risk to the upside (beyond your breakeven). And as a kicker, should the market correct really hard you are locking in a price that you would not mind getting long well below the current price of the market, as you will see in a moment.

According to TastyTrade, a Jade Lizard should be constructed to have zero upside risk. In this instance I had that opportunity but decided to take on a little risk to the upside for a bit more downside protection, as I am personally bearish 2016 price action.

Details & Visuals of the Option Strategy

The Trade: Sold 1 January 2017 195/225 callspread @ $11.74 & Sold 1 January 2017 $194 put @ $16.60 for a total credit of $28.34 ($2,834 in total premium collected). When I placed the order the SPY was trading at $194.44.

Below you can visually see the area of profitability as well as both the upside and downside break even points (makes money anywhere between the yellow lines):

SPY Chart with Break Evens

Break-even Points: $165.66 & $223.38 (includes commissions). This represents a +/- 15% range from the market price at the time of the order of $194.44 (or almost a $58 price range)

Based on the break-even point to the upside that still allows the SPY to finish up approximately 9.5% on the year (based on a 2015 closing price of $203.87), the risk to the upside is capped due to the purchase of the $225 call (within the callspread).

Upside Max Loss: The max loss is $166 to the upside (includes commissions). I was willing to take a little risk to the upside in order to get more downside protection. This position starts to lose money at $223.39 (9.5% higher than 2015 closing price of $203.87), but is capped at $225.

Downside Max Loss: The max loss to the downside is theoretically $16,566, but that would mean the ETF goes to zero. I am not concerned with the downside on this, because I am comfortable owning the ETF at $165.66 if exercised and forced to take possession (this price reflects a 23% correction from the all-time high of $213.78 set on 5/18/15).

Profit Zone: Anything Greater than $165.66 and Less Than $223.38.

Max Profit: $2,834 with SPY @ ~$194.50

Let’s take a look at the risk profile of this particular trade set up:

The blue line below represents the risk profile of this position and you can see the profit based at different closing prices for SPY at expiration.

SPY Option Risk Profile


I think 2016 is going to be flat at the BEAR (play on words) minimum to down 10% or more. Obviously no one actually knows when the market will finally correct, but we are going on 7 years now and signs from all over the place are pointing to weakness, at least from my vantage point.

This type of strategy allows you the ability to eliminate FOMO (fear of missing out), but still giving you a large margin of safety. I think it would be a surprise to most if 2016 went on to make new all-time highs…and even more surprising if it moves up double digits in percentage terms. If the bull market was just getting started I likely would not be putting this trade on, instead I would just be selling naked puts.

In all honesty I hope the market not only touches my downside breakeven of $165.66, but I hope it goes on to trade even lower than that. This will only present way more opportunities to sell inflated option premium and get long equities at bargain prices. Until the next cycle I will be hoarding cash and using this strategy as a way to get paid while we wait for the market to resolve itself.

This position does the best if the market stays flat.

The reality of this strategy is that it makes money whether the market goes up, down, or trades sideways (and that is a beautiful thing).

And before I sign off I would like to provide a little more context and support coming from the options market that the expectation is for a down year. The probability of the SPY touching $165 is 60%, where the probability currently priced into the options market for the SPY to touch $225 is only 26%.

Some people paint by numbers, I prefer to trade by numbers (i.e. probabilities).

-Gen Y Finance Guy

Gen Y Finance Guy

Hey, I’m Dom - the man behind the cartoon. You’ll notice that I sign off as "Gen Y Finance Guy" on all my posts, due to the fact that I write this blog anonymously (at least for now). I like to think of myself as the Chief Freedom Officer here of my little corner of the internet. In the real world, I’m a former 30-something C-Suite executive turned entrepreneur turned capital allocator. I am trying to humanize finance by sharing my own journey to Financial Freedom. I believe in total honesty and transparency. That is why before I ever started blogging, I decided that I would share all of my own financial stats. I do this not to brag, but instead to inspire motivate, and also to hold myself accountable. My goal is to be a beacon of hope, motivation, and inspiration, for you, the reader, by living life by example and sharing it all here on the blog. My sincere hope is that you will be able to learn from me - both from my successes and my failures! Read More



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6 Responses

  1. hey GYFG,
    great to read these option stories. A jade lizard is on my todo to get tested at one time. It is cumbersome at my current broker. I see the benefit of this type of trades.
    For now, I limit myself to naked puts and covered calls. They allow me to have the excitement I look for with the markets.

    Keep us posted on how this trades goes and when you take it off.


    1. Hey AmberTree – Glad you like these posts on options. I will make any updates to this particular trade in the comments of this post.

      It currently has a gain of $165 and is paying $3.40/day in Theta Decay.

  2. Hey Dom,

    First off, I love that you are posting about trading with options!

    On the trade, it looks like went really far out January 2017 – any reason for that? Tasty Trade advocates 45 days as the sweet spot.
    How will you manage this trade? Will you take it off if you reach 50% of your max profit?

    Just wanting to get your perspective.

    1. Hey G-Man,

      Yes, this trade uses options with January 2017 expiration.

      My initial response compared to what TastyTrade promotes is the fact that it is just another style of trading. I used to be a lot more active, but personally found that I was overtrading my account by using shorter dated options.

      I have found over time that I much prefer to put on longer term core positions that I can trade around and just let theta do its thing. By going further out in time I have been able to significantly increase my profitability and my discipline.

      I am a huge advocate of TastyTrade, especially to anyone starting out. I give a lot of credit to Tom Sosnoff for a lot of the knowledge I have acquired over the years. That said, at the end of the day once you understand the basics, you need to find the right timeframe and application of that knowledge to fit your individual needs (i.e risk profile, time your willing to commit, and where you fit on the passive vs. active spectrum).

      Its a bit more complicated of an answer with respect to how I will manage this trade. If it moved to 50% profit in the next couple of days or weeks, sure I would take it off. However if it hits 50% profit with 2 months to go until expiration I would probably leave it on if we were in the lower half of the large range and consider taking it off if we were in the upper 50% of the range.

      Even more likely is that we trade near or below the bottom end of the range where I would look to lift the short call spread to book the profit on that leg of the trade and look to sell another put under the market to move my effective long price significantly below my current breakeven of $165ish. But, again it depends how fast that happens, because if there is still 40% or more of the premium I would probably leave the short call spread on and just sell the next put below the market.

      If I did take the short callspread off I would be open and willing to put it back on on a significant rally back to the upside, and would even be willing to roll the strikes down depending on my thesis at the time.

      That is a long winded answer to basically tell you it depends.

      This particular position either gets me long the SPY at a price that significantly off the all time highs or I try to extract and keep as much of the premium as possible as long it stays in n the range I set up. All with very little risk to the upside.

      Probably a discussion worth jumping on the phone or Skype to discuss further.


  3. Nice little break-down here Dom!
    Interested to know how much research and analysis you put into the options strategy?
    You make it sound too easy there haha, I get the impression it’s not that easy 😉

    Thanks for posting this short and sharp article

    1. Jef – Once you understand how options work, this type of strategy doesn’t take a lot of research and analysis. But I will say that I have been investing with options for almost a decade now.

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