Understanding Jade Lizard Strategy – Options Trading Strategy Tutorial

Rajandran R
Telecom Engineer turned Full-time Derivative Trader. Mostly Trading Nifty, Banknifty, USDINR and High Liquid Stock Derivatives. Trading the Markets Since 2006 onwards. Using Market Profile and Orderflow for greater than a decade. Designed and printed 100+ open supply buying and selling techniques on numerous buying and selling instruments. Strongly consider that market understanding and sturdy buying and selling frameworks are the important thing to the buying and selling success. Writing about Markets, Trading System Design, Market Sentiment, Trading Softwares & Trading Nuances since 2007 onwards. Author of Marketcalls.in)

February 13, 2024

2 minutes learn

The Jade Lizard is an choices buying and selling technique that’s designed to gather premium whereas sustaining a directional bias and eliminating the danger on one facet of the commerce. It’s usually used when the dealer has a impartial to barely bullish outlook on the underlying inventory or index. The technique combines a brief put, a brief name, and an extended name choice with the next strike worth. The concept is to generate a internet credit score that’s the sum of the premiums collected from the brief choices, which ought to be higher than the price of the lengthy name.

Understanding Jade Lizard Strategy – Options Trading Strategy Tutorial
Understanding Jade Lizard Strategy – Options Trading Strategy Tutorial 5

Here’s how a Jade Lizard technique will be structured utilizing the NIFTY index for example, with assumption that spot worth of Nifty is now at 21729.8

  1. Sell ​​an OTM Put Option: Choose a put choice with a strike worth beneath the present NIFTY degree (21729.8 on this instance). The put choice ought to be out of the cash (OTM). For occasion, you may promote a NIFTY put choice with a strike worth of 21300.
  2. Sell ​​a Near OTM Call Option: Then, promote a name choice with a strike worth above the present NIFTY degree. This name choice also needs to be out of the cash. For instance, you can promote a NIFTY name choice with a strike worth of 22000.
  3. Buy a Far OTM Call Option: Finally, purchase a name choice with a strike worth larger than the decision choice bought. This choice acts as safety in case the market rallies strongly. You may purchase a NIFTY name choice with a strike worth of 22150.

When organising the Jade Lizard, the premium obtained from promoting the put and name ought to be higher than the premium paid for the upper strike name. The aim is to make sure the entire credit score obtained covers the distinction between the strike worth of the brief name and the lengthy name, successfully eliminating the upside danger.

Here is the Constructed Jade Lizard Strategy

  • Sell ​​1x NIFTY twenty ninth February 2024 22000 CE (Call) for a credit score of ₹174.1
  • Sell ​​1x NIFTY twenty ninth February 2024 21300 PE (Put) for a credit score of ₹98.6
  • Buy 1x NIFTY twenty ninth February 2024 22150 CE (Call) for a debit of ₹119.1
Understanding Jade Lizard Strategy – Options Trading Strategy Tutorial
Understanding Jade Lizard Strategy – Options Trading Strategy Tutorial 6

The internet credit score obtained from this commerce setup is the sum of the credit from the brief put and name (₹174.1 + ₹98.6 = ₹272.7) minus the price of the lengthy name (₹119.1), which equals ₹153.6.

Risk Profile:

  • Maximum Profit: The most revenue is restricted to the online premium collected if the NIFTY closes above the put strike worth and beneath the decision strike worth at expiration.
  • Maximum Loss: The danger is restricted on the upside as a result of the loss on the brief name is roofed by the lengthy name. However, if NIFTY falls beneath the put strike worth, the technique faces draw back danger equal to the strike worth of the brief put minus the online premium obtained.
  • Breakeven: The breakeven level for the put facet of the commerce is the strike worth of the brief put minus the online premium obtained.

Considerations:

  • The technique advantages from time decay (theta) for the reason that choices bought are out of the cash.
  • Implied volatility (vega) can impression the technique; a lower in volatility is helpful since it can scale back the worth of the brief choices.
  • The technique requires margin because it includes writing uncovered choices.

In the instance, the NIFTY is at 21729.8, and the technique has a chance of revenue of 80.38% with a most revenue of ₹7,680 (6.00% return on margin/premium) and a most loss that’s undefined because of the nature of writing. a unadorned put. The breakeven level is calculated at 21147.0.

Remember, this technique ought to be employed by these with a agency understanding of choices buying and selling and the dangers concerned. It’s necessary to handle the commerce actively and have a plan for various market situations. Always be aware of transaction prices and slippage, which may impression the general profitability of the technique.

Who Should Practice It?

The Jade Lizard technique is good for intermediate to superior merchants because of a number of causes:

  • It includes writing uncovered choices, which comes with margin necessities and the necessity for a radical understanding of potential obligations.
  • The technique requires an understanding of how one can handle the commerce, significantly if the market strikes towards the place.
  • Traders want to have the ability to choose applicable strike costs and expiration dates to make sure a positive premium assortment whereas managing danger.
  • Since it includes a mix of choices, merchants ought to be snug with advanced methods and the potential changes that is perhaps vital in the course of the lifetime of the commerce.

Understanding Jade Lizard Strategy – Options Trading Strategy Tutorial

Rajandran R
Telecom Engineer turned Full-time Derivative Trader. Mostly Trading Nifty, Banknifty, USDINR and High Liquid Stock Derivatives. Trading the Markets Since 2006 onwards. Using Market Profile and Orderflow for greater than a decade. Designed and printed 100+ open supply buying and selling techniques on numerous buying and selling instruments. Strongly consider that market understanding and sturdy buying and selling frameworks are the important thing to the buying and selling success. Writing about Markets, Trading System Design, Market Sentiment, Trading Softwares & Trading Nuances since 2007 onwards. Author of Marketcalls.in)

Source link

#Understanding #Jade #Lizard #Strategy #Options #Trading #Strategy #Tutorial