Big Lizard
Prerequisite strategies: the jade lizard immediately before this one, and beneath it the iron butterfly, the bear call spread and the cash-secured put. Clear the Level 3 gate first.
Why this structure exists
A short straddle collects the largest credit on the chain in exchange for an obligation in both directions. Most of that credit comes from the put — equity index skew makes downside insurance the expensive part — while the call side pays less and carries the one risk with no arithmetic ceiling. The big lizard acts on that asymmetry: keep both at-the-money shorts, then spend part of the credit on a further-out call, turning the naked call into a bear call spread.
What you have bought is a proof. If the total credit exceeds the width of that call spread, then above the long strike the two calls net to a fixed loss smaller than the money already in your account, and the position settles profitable at any index level whatsoever. It is the only structure in this library where one side of the payoff can be verified with a subtraction before you click, rather than hoped for.
The price of that proof is written in three places. The credit falls from £4,015.36 to £2,808.01. Buying power rises from £13,500 to £14,672.06, because you have paid for an asset and still carry the uncovered put. And the position is no longer neutral: net delta at entry is +£3.30 per index point, the exposure of being long roughly £29,700 of FTSE 100. A big lizard is a bullish-to-neutral trade wearing a market-neutral costume.
Why not just sell the jade lizard instead? Because its short strikes are out of the money, so it collects perhaps half the premium and gives up the thing you came for: an at-the-money put is the richest single option on the chain. The honest answer is that for most UK accounts the jade lizard, or the fully-winged iron butterfly, is the correct trade — the big lizard earns its place only when implied volatility is high enough that the credit clears the width with room to spare.
Construction
| Leg | Buy / Sell | Quantity | Strike rule | Expiry rule | Target delta | Price |
|---|---|---|---|---|---|---|
| Put | SELL (credit) | 1 contract = £10 per index point | Nearest listed strike to spot | 30–60 DTE; never a weekly | −0.48 | 198.0 pts = £1,980.07 |
| Call | SELL (credit) | 1 contract, same strike, same expiry | Same strike as the put | Same expiry | +0.51 | 203.5 pts = £2,035.29 |
| Call | BUY (debit) | 1 contract, same expiry | Above the shorts, width < total credit | Same expiry | +0.36 | 120.7 pts = −£1,207.35 |
| NET | Net credit | 1 big lizard | 9,000 / 9,000 / 9,200, spot 9,000 | 45 days | +£3.30 per point | 280.8 pts = £2,808.01 |
Two hard inequalities. The first is the whole strategy:
Formulas: max profit = (credit − round-trip costs) × multiplier, and only if settlement is exactly at the short strike. Upside floor = (credit − width) × multiplier − costs, for every settlement at or above the long call strike. Breakeven = short strike − credit + costs in points; there is no upper breakeven. Max loss = (short strike − credit) × multiplier, realised only if the index reaches zero — a bound, not a plan.
The right-hand shelf is the whole point: above 9,200 the expiry line is flat at +£796.01 and never touches zero again, however far right you extend the axis. The left-hand side simply keeps going. Note too that the dashed line — the position now — sits below the shelf until the index is well above 9,200: the proof is an expiry proof, not a today proof.
Entry criteria
| Gate | Rule | Reason |
|---|---|---|
| The construction test | Total credit > call spread width, on executable prices | Fail it and this is a short straddle with a partial hedge. This gate comes before every other one |
| IV rank / percentile | IVR ≥ 50 and IV percentile ≥ 50 | You are short £132.88 of vega a point, and cheap volatility is what makes the credit fail the width test |
| Skew | 25-delta put IV minus 25-delta call IV in the upper half of its 12-month range | Skew is the fuel: the expensive put is what you sell, the cheap upside call what you buy |
| Term structure | Front month at or above the second month | A contango curve means selling the cheap end of the surface at the strike with the most gamma |
| Days to expiry | 30–60, closed at 21 | Gamma at 7 DTE is 3.3× gamma at 45 DTE, and the long call decays too |
| Strikes | Shorts at the nearest listed strike to spot; long call at the widest wing that still passes the credit test | Each extra 50 points of width costs roughly £300 of upside floor |
| Liquidity | Spread ≤ 3% of the package mid; open interest ≥ 250 on all three legs | Three legs, three spreads, twice over. On a thin chain the bid-ask alone eats the 80.8-point margin the proof needs |
| Event calendar | No MPC decision, US CPI, index review or quarterly roll inside the window | The at-the-money put is short exactly what an event delivers |
Do not enter if: the credit does not exceed the width on executable prices rather than mids; IV rank is below 50; initial margin exceeds 5% of net liquidation value; a 20% gap in this underlying would cost more than 10% of net liquidation value (here, £156,392 of equity per contract); you already carry short premium in a correlated underlying; or you cannot state the liquidation threshold in pounds.
Greeks at entry and how they evolve
| Greek | Entry, 45 DTE, 9,000 | 22 DTE, unchanged | 7 DTE, unchanged | +1 SD (9,505.6, IV 14%) | −1 SD (8,494.4, IV 20%) |
|---|---|---|---|---|---|
| Delta (£ per point) | +3.30 | +2.75 | +1.52 | +0.09 | +6.99 |
| Gamma (£/pt per 100 pts) | −0.83 | −1.27 | −2.76 | −0.21 | −0.62 |
| Theta (£ per day) | +22.91 | +35.61 | +77.97 | +4.97 | +22.89 |
| Vega (£ per vol point) | −132.88 | −99.51 | −68.52 | −33.40 | −109.64 |
Black–Scholes at 16% implied volatility unless stated, 4% rates, 3.5% index dividend yield, per one £10-a-point contract. The long call halves the straddle's exposure across the board: gamma is −0.83 against the short straddle's −1.57, and vega −132.88 against −250.86.
Delta decides this trade, which is the thing the label hides. At entry you are long £3.30 a point; one standard deviation down you are long £6.99 a point — the equivalent of holding £59,376 of index, twice the exposure you signed up for, bought for you by gamma on the way down. The character flip is sharp and one-directional: on a rally delta drains to +£0.09 and the position becomes an inert bond paying £5 a day; on a fall it becomes a leveraged long. The trade wins by boredom and loses by acceleration, and the £22.91-a-day theta does not compensate for the second.
FTSE 100 at 9,000, implied volatility 16%, 45 days to run
The ICE FTSE 100 index option is worth £10 per index point (£90,000 of notional at 9,000), is European style so no leg can be assigned early, settles in cash against the Exchange Delivery Settlement Price, ticks in 0.5 points (£5), trades 08:00–16:50 London, and on the third Friday stops trading as soon as reasonably practicable after 10:15. All prices below are modelled, not live quotes.
The trade: sell 1 × 9,000 put, sell 1 × 9,000 call, buy 1 × 9,200 call, same expiry.
Branch A — the proof, tested to destruction. FTSE settles at 12,000. Nobody expects this; that is the point of a proof.
Branch B — the target fires. FTSE 9,100 with 21 days left and implied volatility down to 13%.
Branch C — tested. FTSE 8,600 with 30 days left, IV up to 21%.
Branch D — the gap. FTSE opens 7,200, down 20%, IV 45%, 45 days left.
On an ICE UK single stock instead the inequality barely survives, and that is the teaching point. A BP big lizard at 530p, 45 days and 26% implied volatility — short the 530 straddle at 38.38p, long the 560 call at 8.11p — collects 30.27p, or £302.67 per 1,000-share contract, against a 30p wing worth £300.00. It passes by £2.67, less than one 0.25p tick (£2.50). Narrow the wing to the 550 call and it passes properly (£274.14 against £200.00); widen it to the 570 and it fails outright. Worse, ICE UK single-stock series are American style and physically delivered, so the put can be assigned early into 1,000 shares at £5,300 plus £26.50 of SDRT. The big lizard is a FTSE 100 index trade or it is not a UK trade.
This is a single, hand-picked, favourable scenario. It is not a typical or expected outcome. Every premium here is modelled from Black–Scholes at the stated inputs, not taken from a live chain, and 9,000 is an illustrative round number rather than a quote. Real fills are worse, and on a three-leg package the slippage lands three times. Past performance, including any illustrative example shown here, is not a reliable indicator of future results.
Management and adjustment
| Trigger | Diagnosis | Action | Do NOT do this |
|---|---|---|---|
| Long 9,200 call falls to a few points on a sell-off | The wing has done its job and looks like dead money | Leave it. Its cost is sunk and its presence is the entire proof | Sell the wing. Taking £356.70 for it at 8,600 turns this into a short straddle with unlimited upside risk |
| Net delta beyond +£5.00 a point | Gamma has doubled your directional exposure on the way down | Roll the untested short call down toward the money for a net credit, or cut contracts | Roll the tested put down — on the Branch C arithmetic that is a debit, which is forbidden |
| Index breaches the breakeven (8,720.4) | The put is in the money; the trade is a leveraged long | Decide on the stop, not the chart. Below the stop, close | Add contracts to improve the average. Short gamma does not average |
| Loss reaches 100% of credit (£2,808.01) | The trade has failed on its own terms | CLOSE. All three legs, one order | Roll for a net debit, or wait for the index to come back |
| IV expands after entry | Vega loss, −£132.88 a point, arriving before any delta loss | Hold if delta is inside the band and the stop is intact; higher IV makes a credit roll richer | Panic-close a vega loss that has not yet become a delta loss |
| Sharp rally with an IV spike | At 9,500 and 35% IV the position marks −£855.86 despite a provably safe expiry | Hold, or close for the small loss if margin is tight. The expiry floor is intact | Treat "no upside risk" as "no upside margin call". It is not |
| Index gaps through the short strike | Undefendable | Close at the open. Size the loss, not the hope | Anything else. Every adjustment at a gap adds risk to a position already too big |
| 21 days to expiry reached | Gamma is about to triple | Close, or roll the structure to the next monthly for a credit — re-proving credit > width on the new strikes | Carry it into expiry week for the last of the theta |
| Margin usage > 50% of net liquidation value | The broker is managing the position, not you | CLOSE enough contracts to get back under 25% | Wait for the margin call. Forced liquidation happens at the day's worst prices |
ROLL WHEN the index is still above the breakeven, more than 21 days remain, and the new structure can be established for a net credit that again exceeds its own call spread width — the proof must be re-established every time you touch the position. ROLL TO the same expiry (a strike roll) or the next monthly (a duration roll), never both in one order. DO NOT ROLL for a net debit: Branch C is what that looks like in figures, a £334.03 cash payment to keep an uncovered put alive, shrinking the credit the whole structure's arithmetic rests on. And the case nobody writes down: when the loss reaches the credit, or when defending would take buying-power usage above half of net liquidation value, the correct action is to close, not to adjust. Defence has a budget of £2,808.01 here, and it is spent once.
Exit rules
If all four are silent, do nothing and check net delta again tomorrow. Here "nothing" is an active decision costing £0.83 of gamma a point.
Margin and broker reality
A cash account cannot hold this and neither can a standard margin account without uncovered-option permission. In practice you also want portfolio margin, and Interactive Brokers UK requires USD 110,000 of net liquidation value to upgrade an existing account, and restricts margin-increasing trades once an account falls below USD 100,000. That figure, not confidence, is the real gate for UK retail. Hargreaves Lansdown, AJ Bell and Trading 212 offer no options at all, in any account.
The figures below use the published Cboe strategy-based schedule, because you can recompute it yourself. An uncovered broad-based index put requires 100% of option proceeds plus 15% of the underlying index value, less any out-of-the-money amount, floored at proceeds plus 10% of the index value; maintenance substitutes current market value for entry proceeds, which is why the requirement rises automatically as the option you sold gets more expensive. A short call vertical requires the lesser of the uncovered-call figure and its own maximum loss — here the 200-point width. IBKR margins the ICE FTSE 100 series on a risk-based model rather than this schedule, so your own order preview governs; the direction of travel does not change.
Liquidity is a margin-equivalent cost, and a three-leg structure pays it three times on the way in and three times on the way out. The ICE FTSE 100 chain is the only UK-underlying options market deep enough; on an ICE UK single-stock series a 5% spread on the £302.67 BP credit is £15.13, which on its own is 5.7 times the £2.67 by which that structure passed its own proof.
Stress test
| Scenario (move at once, 45 DTE left) | Index | Mark-to-market P&L | P&L if held to expiry | Maintenance margin |
|---|---|---|---|---|
| −2 SD, IV 26% | 7,988.8 | −£7,706.11 | −£7,316.34 | £24,348.17 |
| −1 SD, IV 20% | 8,494.4 | −£3,207.38 | −£2,260.16 | £20,436.50 |
| Unchanged, IV 16% | 9,000.0 | −£6.00 | +£2,796.01 | £17,480.07 |
| +1 SD, IV 14% | 9,505.6 | +£899.43 | +£796.01 | £11,801.40 |
| +2 SD, IV 13% | 10,011.2 | +£837.09 | +£796.01 | £12,025.01 |
| −20% gap, IV 45% | 7,200.0 | −£15,639.16 | −£15,203.99 | £31,122.03 |
One standard deviation over 45 days at 16% implied volatility is 505.6 points. Implied volatility is stepped up on down moves and down on up moves to reflect equity index skew. Modelled probability of finishing above the single breakeven: 70.7%, against 57.2% for the equivalent short straddle.
Two rows matter more than the headline. The upside rows are positive and the requirement falls to £11,801.40 — the structure genuinely does not care how far the market rises. The down rows show the requirement climbing while the equity falls, which is how short-premium accounts get closed by their broker rather than by their trader. On 19 October 1987 the FTSE 100 fell 10.8% and a further 12.2% the next day; on 12 March 2020 it fell 10.9% in a single session. A 20% overnight gap is not the tail of this distribution, it is the part that has already happened.
The specific way this structure hurts people is subtler than a crash, and it sits in the −1 SD row: a £3,207.38 mark-to-market loss on a 5.6% fall, from a position sold as having "no risk". The proof was true and irrelevant. Traders who verify the upside arithmetic and then size the trade as though it were defined-risk get liquidated on ordinary bad weeks, never having come near the wing they paid for. Size from the −20% row instead: if a 20% gap across your whole short-premium book would cost more than 10% of net liquidation value, the book is too big — here, £156,392 of equity per contract.
the long call is never closed before the short call AND every roll must re-prove total credit > call spread width on the new strikes. If you want the wing's remaining value, close the whole structure.What to trade instead
Simpler, from the tier below: the iron butterfly is this trade with a put wing bought as well. It gives up part of the credit and caps the loss at a number you can write down, removing the margin spiral, the liquidation threshold and the reason this page needs a stress test. For nearly every UK retail account it is the correct expression of the same view, and the £14,672.06 of buying power the lizard consumes will fund several of them.
Alongside, at this tier: the jade lizard is the same idea with out-of-the-money shorts — roughly half the credit, a breakeven much further away, and a far smaller gamma problem. It is where most readers should stop.
More exposed, at this tier: the short straddle is this structure with the wing removed — £1,207.35 more credit, and an unlimited obligation above the strike in exchange. That is the cleanest statement in the library of what a wing is worth.
Risk statement
Uncovered options are among the highest-risk instruments available to a retail client: losses are not limited to the amount invested, can exceed the account balance, and the broker may liquidate positions without notice. The proof on this page concerns the upside only and holds only at expiry; it is not a statement about the risk of the position. This is educational material about mechanics, margin and UK tax treatment, not a recommendation to trade the FTSE 100 or anything else, and it takes no account of your circumstances. Every figure here is modelled rather than quoted. If your trading is frequent enough to raise the investor-versus-trader question, that is one for a qualified adviser.