Jade Lizard Option Strategy – ITC Ltd.

Jade Lizard is neutral to a slightly bullish strategy that combines a short call spread and a short put. A Jade Lizard is placed when we have a neutral to a bullish assumption on a stock that has sold off and has high implied volatility percentile (IVP). High IVP allows us to collect more premium while having no upside risk and by extending the protection on the lower side.

ITC stock, as of 18th July 2017, has sold-off heavily on news of high GST on cigarettes. Jade Lizard strategy is perfect for this situation if your assumption is that ITC’s stock price will stay sideways at present levels or moves slightly to the upside.  Also, a high IVP of 93.3 for ITC stock makes the situation ideal for this strategy. Track IV Percentiles here

Setup for Jade Lizard of ITC:

> Short one OTM Put – We sold 275PE at Rs 3.55
> Short OTM Call Spread – We sold one 290CE at 6.4 and bought one 295CE at Rs 4.45

In total, we receive a net credit of Rs 5.5

The payoff for this strategy at expiry can be seen in the figure.

Jade Lizard -ITC

Payoff for Jade Lizard -ITC

 

The maximum profit potential of this strategy is realized when the stock stays within the range of short put strike (275) and short call strike (290).  So we get a maximum profit of 13,200 if the stock price of ITC stays within 275-290 range.

Breakeven for this strategy is short put strike minus credit received. In our case, therefore, break even will be 269.5  (275-5.5), a 5.47% down-move from the current spot price of ITC.

 

Management of JadeLizard

Since this strategy has no upside risk (if placed correctly), there is no requirement to manage it if it moves to the upside.

On the other hand, if the stock sells off further from the present levels and tests the short put strike of 275, then we can roll-down the short call spread even further to collect more credit without increasing any upside risk.

But if the situation gets even worse & stock moves down beyond the break even, then we can close the position in a loss.

Updates

Exiting the position at a profit of Rs 6360, almost 50% of the max profit potential. Not bad for a two-day position.

Covered 275PE at 0.85 – a profit of Rs 2.7 (3.55-0.85)

Sold 295CE at 3.45 –  a loss of Rs Rs 1 (3.45-4.45)

Covered 290CE at 5.45 – a profit of Rs 0.95 (6.4-5.45)

Total net profit = 2.7+0.95-1 = 2.65 * 2400 (lot size) = Rs 6360

Posted in Options.

3 Comments

  1. Thanks sir .. implemented it with a put buy as well at EOD and that put will be sold off next morning in case of no gap down

  2. what kind of a market environment are you looking for when entering a jade lizard? do you try to spread it out to 1SD? Do you find this more viable than let’s say an Iron condor of selling a strangle … awaiting you reply 🙂

    • When puts are expensive than calls. This happens when a stock is taking a beating. Say if a stock goes down by 10%, then puts have more demand than calls and therefore puts more expensive. That’s the ideal time for Jade Lizard.

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