In options trading, a jade lizard is a custom option strategy which consists of a bear vertical spread created using call options, with the addition of a put option sold at a strike price lower than the strike prices of the call spread. For one underlying security, same expiration date, this strategy consists of buying a call option at one strike price, selling another call option at a lower strike price, then selling an OTM put option at a strike price lower than that of both call options. The addition of the sale of a put option is consistent with the expected move of the underlying and results in additional premium collected. The jade lizard strategy takes advantage of the volatility skew inherently priced into options with naked puts trading richer in premium than naked calls and short call spreads trading richer in premium than short put spreads. This volatility skew effect allows the trader to collect more premium for the overall position and thus, increasing the position's probability of profit. The term "jade lizard" was first used by former CBOE floor traders, Liz Dierking and Jenny Andrews, on the Liz & Jny Show on the Tastytrade Network.
A jade lizard may be created in reverse, in which case it is known as a twisted sister. The construction of a twisted sister consists of a bull vertical spread created with put options, along with the sale of a call option. For one underlying security, a put option is sold at one strike price, and another put option is bought at a lower strike price, then an OTM call option is sold at a strike price higher than that of both put options. The addition of the sale of a call option is consistent with the expected move of the underlying and results in additional premium collected. Although this strategy appears to be a mirror image of the jade lizard, it is not a perfect one. Its main disadvantage is that the volatility skew, as mentioned above in the Jade Lizard section, works against the trader with naked short calls trading for cheaper premium than naked short puts, and short put spreads trading cheaper than short call spreads. The jade lizard will almost always trade for a higher net credit than the twisted sister consisting of the same strikes. Another difference, which relates to the risk-tolerance of the trader, is that the naked call option in the Twisted Sister results in theoretical unlimited loss potential on the upside. Meanwhile, losses on the Jade Lizard are limited to the difference between the strike price of the short put and zero less the original option premium received for selling the Jade Lizard spread.
