In this article, I’ll walk you through a recent trade I executed using the Jade Lizard options strategy on Advanced Micro Devices ($AMD) via the TastyTrade platform. This strategy is particularly effective in neutral to slightly bullish market conditions, especially when implied volatility is elevated. Let’s delve into the step-by-step process of this trade, from inception to closure.
Trade Rationale
AMD’s stock had experienced a significant decline in the weeks leading up to this trade, leading to an increase in implied volatility as earnings approached on January 28th. Elevated implied volatility often results in higher option premiums, presenting an opportunity for premium-selling strategies like the Jade Lizard.
Strategy Selection: The Jade Lizard
A Jade Lizard combines a short put with a short call spread, aiming to capitalize on high implied volatility with limited upside risk. The strategy involves:
- Selling an Out-of-the-Money (OTM) Put: This generates premium and sets a price level below which you’re willing to purchase the stock.
- Selling an OTM Call: This generates additional premium but introduces potential upside risk.
- Buying a Further OTM Call: This caps the upside risk introduced by the short call, creating a call spread.
The goal is to collect a net premium that exceeds the width of the call spread, thereby eliminating upside risk.
Trade Execution
After scanning for suitable Jade Lizard setups using the NinjaSpread tool, I identified an optimal trade with the January 31st expiration, which offered a better risk-reward profile compared to the January 24th expiration. The specific options selected were:
- Short Put 100: Sold an OTM put option.
- Short Call 115: Sold an OTM call option.
- Long Call 117: Bought a further OTM call option to cap potential losses.
This combination resulted in a net credit, providing a cushion against potential downside movement and eliminating upside risk.
Position Management
On January 27th, I decided to close half of the position to lock in profits, executing the trade at a premium of $1.25.
As anticipated, AMD’s stock price declined further the following day. To avoid holding the position into the final days before expiration and to protect the accumulated profits, I closed the remaining half at a premium of $0.80 on January 28th.
Trade Outcome
The total profit from this Jade Lizard strategy amounted to $177. This outcome underscores the effectiveness of the Jade Lizard strategy in capitalizing on elevated implied volatility and managing risk through strategic position sizing and timely adjustments.
Conclusion
The Jade Lizard strategy offers a balanced approach to options trading, particularly in environments characterized by high implied volatility and neutral to slightly bullish outlooks. By thoughtfully selecting strike prices and actively managing the position, traders can enhance their probability of success while mitigating potential risks.
If you have any questions or would like further clarification on this trade or the Jade Lizard strategy in general, feel free to reach out. Thank you for your attention, and happy trading!
