Jade Lizard Options Trading Strategy In Python

 

Jade Lizard Strategy

By Viraj Bhagat

Newer technologies, better software, improvements in connectivity, etc. happening at a tremendous pace has led to a boom in the way knowledge is shared and accessed. Trading has always maintained the front seat position for primary advantage and the same goes for trading strategies. Every trading strategy can’t give you the same outcome, and it is also true that neither can assure consistent returns for longer durations. To stay up in the game, one has to keep learning, evolving and making their strategy even better.

Options were created to help manage the risk better. Options trading strategies are widely practised today and produce various results under various conditions.

Some of the well-known strategies are:

We’ve all read about trading strategies like Iron CondorButterfly SpreadBear Call Ladder, and many others. But, there is one strategy in particular according to me which offers good results during high implied volatility, and that is Jade Lizard.

But before we go to Jade Lizard, let us understand the meaning of Lizards in Trading.

What Are Lizards In Trading?

Lizards are a type of Options Trading Strategy which is practised by Traders to gain profit from their trades

  • In case of Straddles and Strangles, Lizards reduce the upside risk
  • They are most beneficial when underlying stays or drifts toward the strike
  • High profits are produced in high IV and non-bearish environments

Jade Lizard Strategy In PythonClick To Tweet

Jade Lizard Options Trading Strategy

It is a neutral or bullish custom option trading strategy which is specific in nature.

  • It includes a Short Put and a Short Call Spread
  • Since it consists of a Short Call Spread it is slightly Bullish
  • It does not have an upside risk
  • It takes advantage of high volatility on the put and call premiums
  • Executed in a way that:
    The value produced by complete credit (from the 3-pronged position) > Difference between the Call position Strike Prices

When To Practise Jade Lizard?

A Jade Lizard Trading Strategy is generally practised if there was a high IV and /or if the stock had recently fallen i.e the stocks are oversold.

Components Of A Jade Lizard Trading Strategy

It consists of:

  1. A Bear Vertical Spread using Call Option, and
  2. Put Option sold at Strike Price Lower than the Strike Price of the Call Options

In a Jade Lizard Options Trading Strategy, we Sell a Short Put and Sell a Short Call Credit Spread (Ensure that Total Credit received > Width of the spread) given the condition that the underlying should not move much.

Here, the premium collected is greater than the width of the strikes of the Call Spread

The Jade Lizard would look something like this:

Jade-Lizard-Diagram

Setup Of A Jade Lizard Strategy

Profit: Profit here is the credit received from the opening trade

Max. Profit: Underlying expires between the short put and short call of the spread.

Loss: If credit is lesser than the width of the Call spread, and there is upwards movement

Steps:

  • Step 1 – Buy a Call Option at 1 Strike Price
  • Step 2 – Sell a Call Option at Strike Price lower than the strike price of the Call Option bought in step 1
  • Step 3 – Sell an OTM Put Option at Strike Price lower than both the above Call Options
Note: In case OTM Puts are bought, the Lizard will face the opposite direction

In short: Jade Lizard = Sell Strangle + Buy OTM Call

Here, the trades for the credit is larger than the width of the Call Strikes

Caution: 
Remember! Don’t confuse Jade Lizard with Big Lizard Strategy where, 
Big Lizard = Sell Straddle + Buy OTM call

Assumption made:

  • Richness: Naked Put Trades > Naked Call Trades
  • Richness (In Premium): Short Call Spreads > Short Put Spreads

Difference Between Big Lizard Trading Strategy And Jade Lizard Trading Strategy

  • Big Lizard Trading Strategy and Jade Lizard are very similar to straddle and strangle
  • The only difference is that to mitigate the risk they layer on one more option position
  • They are closely related strategies
  • In both strategies, 3 different options positions having the same expiration month are combined
  • The intention of practising both of these strategies is to maximize the reward and minimize the risk

  Big Lizard = Sell Straddle + Buy OTM Call

Jade Lizard = Sell Strangle + Buy OTM Call

Example Of A Jade Lizard Strategy

Consider an example of ABC Company. The setup for Jade Lizard would be as follows:

Call/Put Long/Short or Buy/Sell Strike Price Cost (INR)
Put OTM -1 570 10
Call OTM -1 590 20
Call OTM +1 595 15

Thus,

Net Credit  = 1 OTM Put + 1 OTM Call – 1 OTM Call
Net Credit  = 10+20-15
Net Credit = 15

In total, we receive a net credit of INR 15

Breakeven  = Short put strike – Credit received
Breakeven  = 575-15
Breakeven = 560

In our case, therefore, break-even will be at a 5.47% down-move from the current spot price.

Note:

- Strike Selection and impact of Volatility
- Short put profit should be around 70% and the call spread profit around 30%
- If the call spread is ITM, we have to buy it back

Implementing The Jade Lizard Options Strategy

I will use Tech Mahindra (Ticker – NSE: TechM) option for this example.

TechM Movement

Last 1-month stock price movement (Source – Google Finance)

There has been quite some movement in the stock price of Tech Mahindra Ltd., the highest being 702 and lowest being 652.95 in last 1 month. For the purpose of this example; I will sell 1 out of the money Put, sell 1 out of the money Call and buy 1 out of the money Call Options.

Here is the option chain of TechM for the expiry date of 31st May 2018 from nseindia.com

TechM Option chain

TechM Calls

TechM Puts

Ideally, the following should be the Payoff for this Jade Lizard Trading Strategy.

Jade Lizard Payoff Chart

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Calculate The Jade Lizard Options Strategy Payoff In Python

Now, let me take you through the Payoff chart using the Python programming code.

Import Libraries

import numpy as np
import matplotlib.pyplot as plt

Call Payoff

def call_payoff(sT, strike_price, premium):
return np.where(sT > strike_price, sT - strike_price, 0) - premium
# TECHM Stock price
spot_price = 688

# Long call
strike_price_long_call = 750
premium_long_call = 4.30

# Short call
strike_price_short_call = 730
premium_short_call = 6.80

# Stock price range at expiration of the call
sT = np.arange(0.9*spot_price,1.1*spot_price,1)
payoff_long_call = call_payoff(sT, strike_price_long_call, premium_long_call)

fig, ax = plt.subplots()
ax.spines['bottom'].set_position('zero')
ax.plot(sT,payoff_long_call,label='Long Strike Call',color='g')
plt.xlabel('Stock Price')
plt.ylabel('Profit and Loss')
plt.legend()
plt.show()

Long Strike Call

payoff_short_call = call_payoff(sT, strike_price_short_call, premium_short_call) * -1.0

fig, ax = plt.subplots()
ax.spines['bottom'].set_position('zero')
ax.plot(sT,payoff_short_call,label='Short Strike Call',color='r')
plt.xlabel('Stock Price')
plt.ylabel('Profit and Loss')
plt.legend()
plt.show()

Short Strike Call

Put Payoff

def put_payoff(sT, strike_price, premium):
return np.where(sT < strike_price, strike_price - sT, 0) - premium
# stock price
spot_price = 688

# Short put
strike_price_short_put = 660
premium_short_put = 7.85

# Stock price range at expiration of the put
sT = np.arange(0.9*spot_price,1.1*spot_price,1)
payoff_short_put = put_payoff(sT, strike_price_short_put, premium_short_put) * -1.0

fig, ax = plt.subplots()
ax.spines['bottom'].set_position('zero')
ax.plot(sT,payoff_short_put,label='Short Strike Put',color='m')
plt.xlabel('Stock Price')
plt.ylabel('Profit and Loss')
plt.legend()
plt.grid()
plt.show()

Short Strike Put

Jade Lizard Payoff

payoff = payoff_long_call + payoff_short_call + payoff_short_put

fig, ax = plt.subplots()
ax.spines['bottom'].set_position('zero')
ax.plot(sT,payoff_long_call,'--',label='Long Strike Call',color='g')
ax.plot(sT,payoff_short_call,'--',label='Short Strike Call',color='r')
ax.plot(sT,payoff_short_put,'--',label='Short Strike Put',color='m')
ax.plot(sT,payoff,label='Jade Lizard Payoff')
plt.xlabel('Stock Price')
plt.ylabel('Profit and Loss')
plt.legend()
plt.grid()
plt.show()

Jade Lizard Payoff

Jade Lizard Formation

payoff = payoff_long_call + payoff_short_call + payoff_short_put

fig, ax = plt.subplots()
ax.spines['bottom'].set_position('zero')
ax.plot(sT,payoff,label='Jade Lizard Payoff')
plt.xlabel('Stock Price')
plt.ylabel('Profit and Loss')
plt.legend()
plt.grid()
plt.show()

Jade Lizard

profit = max(payoff)
loss = min(payoff)
print (profit)
print (loss)
Max. Profit: 10.35
Max. Loss:  -30.45

Conclusion

From the above plot, for Jade Lizard Options Strategy Max. Profit and Max. Loss can be observed. In this article we have covered all the elements of Jade Lizard Trading Strategy using a live market example and by understanding how the strategy can be calculated in Python. The payoff can also be calculated with the help of the Excel sheet that I have provided as a downloadable file along with the Python Code.

Next Step

Are you keen on learning more about algorithmic trading? Connect with us and get to know different worldviews on financial strategies. QuantInsti® aids people in acquiring skill sets which can be applied across various trading instruments and platforms. The Executive Programme in Algorithmic Trading (EPAT™) course covers training modules like Statistics & Econometrics, Financial Computing & Technology, and Algorithmic & Quantitative Trading. EPAT™ equips you with the required skill sets to be a successful trader.

Disclaimer: All investments and trading in the stock market involve risk. Any decisions to place trades in the financial markets, including trading in stock or options or other financial instruments is a personal decision that should only be made after thorough research, including a personal risk and financial assessment and the engagement of professional assistance to the extent you believe necessary. The trading strategies or related information mentioned in this article is for informational purposes only.

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Download Data File

  • Jade Lizard Options Strategy – Python Code
  • Jade Lizard Payoff Calculation – Excel Sheet

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