Income Enhancer That Caps Upside Risk

August 2, 2023

In a recent Income Masters Live Trading Session, Dave Durham covered a new income-generating strategy that we will be incorporating into the service. It has an interesting name and an even more interesting risk profile.

It’s called the “jade lizard,” and it works as an enhancement to our go-to income strategy of selling short put options to generate premium. 

To create a jade lizard, you sell a put option with a strike price below the current stock price and sell a call spread above where the stock is trading to collect additional premium.

This is a neutral-to-bullish trade, where the max profit is the credit you collected and the max risk is the sold put strike x 100 less the credit received. In this case, the call spread you sold offers additional downside protection in the form of more credit brought in. 

What makes the jade lizard so interesting is that, as long as the total credit received is greater than the width of the call spread, there is no risk if the stock trades higher and the call spread goes in the money.

Source: QuantInsti.

Let’s say XYZ stock is trading at $100. To create a jade lizard, you could start by selling to open an out-of-the-money (OTM) put — the XYZ 18 Aug 90 Put — for a credit of $1.50.

You could then write an OTM vertical call spread by selling to open the XYZ 18 Aug 110 Call and buying to open XYZ 18 Aug 112 Call for a $0.75 credit.

Since the width of call spread is 2 points (112 minus 110) and the total credit received is $2.25, you have no risk to the upside.

If the price of the underlying stock is above $90 (short put strike) and below $110 (short call strike) at expiration, you keep the max profit. As expiration approaches and theta decay works in your favor, you may also have the opportunity to close the position early for a decent profit. But as long as XYZ stock stays between $87.75 and $112.25, you will make money.

Research has shown that this strategy tends to make money over time. It works best with stocks that have enough volatility to get an attractive premium for the call spread.

When Dave reviewed the strategy with Income Masters members last week, he provided a list of seven stocks that might be good jade lizard candidates.

One of those names was retailer Target (TGT), and we entered our first jade lizard in Income Masters during the live session.

The trade is working out well, and we may have an opportunity to close it out early. We’ll report back here and let you know how it works out. 

Trade smart,

Emily Norris
Managing Editor
Traders Reserve

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