Other than having no downside risk, the Reverse Jade Lizard option strategy and the Big Lizard option strategy are quite similar. When properly created, this strategy can completely remove all negative risk since it combines an out-of-the-money short call with an out-of-the-money bull put spread. Read more about spread calculators and our out of the money call guidance here.
The Reverse Jade Lizard option strategy, entails selling Out of the Money calls and puts while simultaneously buying a put with the same expiration date but a different strike price to hedge against downside risk. Because it takes ongoing monitoring, the Reverse Jade Lizard option strategy often suits expert traders. Any options trading in India, including the Reverse Jade Lizard, must be well understood before being put into practise. This includes the strategy’s workings, any potential hazards, and the market circumstances that might favour the approach.
What is the Jade Lizard?
Let’s start by taking a closer look at the Jade Lizard, a bull put credit spread that combines a short put and a short call spread. Due to the collection of credit exceeding the width of the short call spread, it has no upside risk, unlike the Reverse Jade Lizard.
Using options with identical expiry dates but different strike prices, a trader can profit from this approach by collecting credit for changes in the stock’s intrinsic value without worrying about the direction or size of those changes.
The Jade Lizard, however, has a significant risk since it reduces the breakeven thresholds in both directions, increasing the likelihood of suffering losses. On the plus side, the danger is constrained at first, making it comparatively safer.
Understanding Reverse Jade Lizard
The reverse jade lizard option strategy entails selling a put spread (a short put and a long put with a lower strike price) as well as a call with a higher strike price than the short put. The objective is to generate more premium from selling the options than the put spread’s maximum loss. By doing this, you may establish a position with minimal risk to the upside and no danger to the downside.
The reverse jade lizard option strategy is appropriate for shares of companies that are anticipated to experience significant declines and have high implied volatility. The approach can profit from both time decay of the options and a decline in volatility following the trade. Depending on the state of the market and the trader’s expectations, the approach may also be changed by rolling the options to various expiry dates or strike prices.
Pros And Cons Of The Reverse Jade Lizard
Let’s now take a look at the benefits and drawbacks of the reverse jade lizard.
Pros: The key benefit of reverse jade lizard option strategy is its ability to produce money and lower risk in erratic markets. As long as the stock price does not increase or decrease over the breakeven thresholds, the method can potentially be beneficial in a variety of situations. The net credit from selling the options is added to or subtracted from the short call and short put’s strike prices to determine the breakeven marks.
Cons: Selling naked calls, which exposes the trader to limitless risk if the stock price rises sufficiently below the put strike price, is the biggest drawback of the reverse jade lizard option strategy. The trader could be obliged to liquidate the position at a loss or acquire the shares at a price greater than the market value. The method also needs someone with extensive trading knowledge, and it has margin requirements as well as continual stock price and option price monitoring.
The reverse jade lizard option strategy is a complicated option strategy that may be used to increase profits and lower risk in choppy markets, but it also has a high level of complexity and risk. Trading professionals who are knowledgeable about options trading and who are aware of the associated risks and rewards should only utilise this method.
When the Reverse Jade Lizard option strategy is executed properly, there is zero downside risk since the total credit earned exceeds the width of the put spread. The Reverse Jade Lizard is a trading method that, for more experienced traders, will greatly boost the profitability of their deals; but, for less experienced traders, the danger is simply too great. Conversely, this technique is riskier since it can lower your break even points in both directions, whereas the risk associated with Jade Lizard is restricted and capped at entrance. As a result, there is a greater chance of suffering losses.
To generate money and boost their profitability, many stock traders employ both Jade Lizard and Reverse Jade Lizard. Whatever trading option you select, you should only use it if you are familiar with the risk window and have a thorough understanding of how to use it and set it up appropriately. Additionally, there are many demat account app like one of share India that offers revere jade lizard in options trading.