Jade Lizard
Prerequisite strategies: you must have traded the bull put spread, the bear call spread and the iron condor to a written plan, and run the cash-secured put through at least one assignment beneath them. Clear the Level 3 gate first.
Why this structure exists
Sell a naked put and you are paid for one obligation. Sell a short strangle and you are paid for two, but the second one — the short call — is the one that has historically emptied accounts, because a rally has no ceiling. The jade lizard keeps the extra credit and deletes the extra obligation: it buys a further-out call against the short call, turning the upside leg into a bear call spread whose worst case is a fixed number of points. If the credit collected is larger than that number, the rally cannot cost you anything. That is the whole design; strike selection, delta and management all follow from wanting to be paid twice while only being short once.
The worked example makes the case concrete. Against a bare short 8,700 put, the lizard collects £1,238.78 rather than £973.43 — 27.3% more for the same downside strike — and moves the breakeven from 8,602.7 to 8,576.1, raising the modelled probability of any profit from 78.4% to 80.0%, for £1,000 more margin. Against a short 8,700/9,300 strangle collecting £1,718.08, the lizard gives up £479.30 of credit and buys this: at a settlement of 10,100 the strangle loses £6,281.92 and the lizard makes £238.78, on almost identical margin (£12,218.08 against £12,473.43).
Why not just sell the bull put spread from the tier below instead? Because a bull put spread has a floor and this does not, and for almost everybody reading this the floor is worth more than the extra credit. The jade lizard belongs at Level 3 not because it is complicated but because its unsecured put means the position is sized by your broker's margin model rather than by your cash. If you cannot state, in pounds, what that model asks for after a 20% gap, take the spread.
Construction
| Leg | Buy / Sell | Quantity | Strike rule | Expiry rule | Target delta | Price |
|---|---|---|---|---|---|---|
| Put | SELL (credit) | 1 contract = £10 per index point | 25–30Δ below spot; a level you would accept | 30–60 DTE | −0.28 | 97.34 pts = £973.43 |
| Call | SELL (credit) | 1 contract, same expiry | 25–30Δ above spot | Same expiry | +0.27 | 74.46 pts = £744.64 |
| Call | BUY (debit) | 1 contract, same expiry | One strike interval higher — narrow enough that credit > width | Same expiry | +0.20 | 47.93 pts = −£479.30 |
| NET | Net credit | 1 lizard | 8,700 / 9,300 / 9,400, spot 9,000 | 45 days | +0.20 (+£2.03/pt) | 123.88 pts = £1,238.78 |
Three hard inequalities. The first is the strategy:
Formulas: max profit = (credit − round-trip costs) × multiplier, for any settlement between the put strike and the short call strike. Upside floor = (credit − width) × multiplier. Breakeven = put strike − credit; there is no upper breakeven while the first inequality holds. Max loss = (put strike − credit) × multiplier — a bound reached only at zero, with nothing in the position capping the loss before it.
The right-hand half is the selling point: the line steps down once, at the long call, and never falls again. The left-hand half is the risk — the same line a naked short put draws. The dashed curve is the position today on a sticky-strike surface with volatility unchanged.
Entry criteria
| Gate | Rule | Reason |
|---|---|---|
| IV rank / percentile | IVR ≥ 35 and IV percentile ≥ 35 | Short £122.02 of vega a point; a 10-point spike costs almost the whole credit before the index moves |
| Skew | Call-side IV rich enough that the call spread clears its own width — best after a sharp rally, when 25Δ call IV has closed on 25Δ put IV | This is a skew trade. On a normally skewed chain the call spread pays 26.53 points against a 100-point width; the put funds the proof |
| Term structure | Front month at or above the second month | Contango means you are selling the cheap end of the curve |
| Days to expiry | 30–60, closed at 21 | Gamma at 7 DTE is 1.54× entry gamma while vega has fallen to 23% of it |
| Strikes | Put 25–30Δ; short call 25–30Δ; long call one interval higher | A wider call spread collects more credit and is likelier to break the inequality. Width is the constraint, not the credit |
| Liquidity | Spread ≤ 3% of the structure mid on every leg; open interest ≥ 250 on all three | Six crossings against 23.88 points of headroom. ICE UK single-stock series fail this outright |
| Event calendar | No MPC decision, US CPI, index review or quarterly roll inside the window | The put is short exactly what an event delivers |
Do not enter if: total credit does not exceed the call spread width at the mid by at least 15%; IV rank is below 35; initial margin exceeds 5% of net liquidation value; you already hold short puts in a correlated underlying; or you cannot state, in pounds, the margin requirement after a 20% gap.
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) | +2.03 | +1.29 | +0.39 | +0.01 | +5.99 |
| Gamma (£/pt per 100 pts) | −0.70 | −0.97 | −1.08 | −0.16 | −0.75 |
| Theta (£ per day) | +23.29 | +31.27 | +32.62 | +8.49 | +24.80 |
| Vega (£ per vol point) | −122.02 | −81.04 | −27.58 | −38.10 | −124.36 |
Black–Scholes, 4% rates, 3.5% index dividend yield, per one £10-a-point contract. At-the-money implied volatility 16% at entry with a skew of IV(K) = ATM − 0.45 × ln(K / spot), re-anchored to the spot shown in each column.
Vega decides the first half of this trade and gamma decides the second. At entry the position is short £122.02 of vega and only £0.70 of gamma: a volatility event that barely moves the index can still take £1,220 of a £1,238.78 credit. By 7 DTE that has inverted — vega down to £27.58, gamma up by half — and the trade has become a bet on where the index closes on one Friday. The other flip is one-way: a rally takes net delta from +£2.03 to +£0.01 a point, because the short call catches up with the put, while a fall takes it to +£5.99, the same exposure as being long roughly £50,900 of FTSE 100. You get flat when you are right and long when you are wrong. That asymmetry, not the credit, is what the defence plan manages.
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 at 9,000), is European style so no leg can be exercised against you 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 shortly after 10:15. Exercise prices are listed in intervals of 25, 50, 100 or 200 points, so 8,700 / 9,300 / 9,400 is a listed set. All prices below are modelled, not live quotes.
The trade: sell 1 × 8,700 put, sell 1 × 9,300 call, buy 1 × 9,400 call.
Branch A — the rally that proves the point. FTSE settles at 9,650.
Branch B — the put is tested. FTSE 8,700 with 25 days left, IV up to 19%.
Branch C — the gap. FTSE opens 7,200, down 20%, IV 45%, 45 days left.
Branch D — the rule broken. The same put and short call, but a 9,450 long call instead of 9,400, because it is cheaper and the credit looks better. Credit rises to 134.31 pts = £1,343.10, £104.32 more than the compliant version, but the width rises to 150 pts = £1,500.00. Credit is now less than width, an upside breakeven appears at 9,434.3, and every settlement above 9,450 loses £156.90. The bigger credit bought a worse trade.
On an ICE UK single stock instead the arithmetic barely survives contact with the chain. A BP jade lizard at 530p — sell the 500 put, sell the 560 call, buy the 570 call, 45 days, 26% implied volatility — collects about 10.98p on a 10p-wide call spread, so the proof passes by 0.98p, or £9.80 per 1,000-share contract. The BP series ticks in 0.25p and the trade needs six crossings: at one tick each that is 1.5p, or £15.00. Costs exceed the entire no-upside-risk margin before the bid-ask is considered. Add physical delivery — assignment on the put means buying 1,000 shares for £5,000 plus £25.00 of SDRT, an effective basis of 491.52p — and American-style early exercise on a leg you were relying on. This is a UK index trade. It is not an ICE single-stock trade.
This is a single, hand-picked, favourable scenario. It is not a typical or expected outcome. Every premium is modelled from Black–Scholes at the stated inputs, not taken from a live chain, and 9,000 is an illustrative round number. Real fills are worse, and the call-side skew that makes the proof pass is not always available. 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 |
|---|---|---|---|
| Net delta beyond +£4.00 a point | The put is tested; gamma has made a neutral trade directional | Roll the untested call spread down for a net credit, then re-prove credit > width. Branch B: +25.39 pts, total 149.26 against 100 | Roll the put down and out for a debit — buying back a loss at the worst price and re-dating it |
| The roll would widen the call spread | More credit, more width — the proof can silently fail | Recompute first. Rolling to 8,900/9,100 collects 47.22 pts, but total credit 171.10 against a 200-point width fails, creating £289.01 of upside risk | Accept a roll on the size of the credit alone |
| Index rallies through the short call | Working as designed | Hold, or close for the £226.78 floor if the buying power is wanted elsewhere | Sell the long 9,400 call to harvest its value. That turns a bear call spread into an uncovered short call and destroys the proof |
| IV expands after entry, index unmoved | Vega loss, −£122.02 a point at entry | Hold while delta is inside the band and the stop is intact; a higher surface makes any roll richer | Panic-close a vega loss that has not become a delta loss |
| IV collapses after entry | The thesis paid, early | Take the 50%-of-credit target the day it appears, whatever the DTE | Hold for the last £619 against £0.70 of gamma a point |
| Index gaps through the put strike | Undefendable | Close both sides at the open. Size the loss, not the hope | Sell a further put to “average the credit”. Two unsecured puts is not a hedge |
| 21 days to expiry reached | Vega is spent; gamma is not | Close, or roll the whole structure to the next monthly for a credit, proving the inequality again | Carry it into expiry week for the last £33 a day |
| Margin usage > 50% of net liquidation value | The broker is managing the position now, 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 untested call spread can be moved toward the money for a net credit at an unchanged or narrower width. ROLL TO the same expiry (a strike roll) or the next monthly (a duration roll), never both in one order. DO NOT ROLL a credit position for a net debit, and do not roll at all until you have re-run total credit > call spread width × multiplier on the post-roll position — this is the only structure in the tier whose defining property can be destroyed by an adjustment that looks profitable. And the case nobody writes down: when the mark-to-market loss reaches twice the credit, or the index gaps through the put strike, or defending would take buying-power usage above half of net liquidation value, the correct action is to close, not to adjust. Past that budget, the call spread is decoration on a naked short put.
Exit rules
If all four are silent, do nothing and check net delta again tomorrow. Here, “nothing” earns £23.29 a day and carries £0.70 of gamma a point.
Margin and broker reality
A cash account cannot hold this and neither can a standard margin account: the short put is unsecured, so uncovered-option permission is mandatory. 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 below USD 100,000. That number, not the elegance of the payoff, is the gate.
The figures below use the published Cboe strategy-based schedule, because you can recompute it yourself: an uncovered put on a broad-based index requires option proceeds + 15% of the index value, less any out-of-the-money amount, floored at proceeds + 10% of the aggregate exercise price; a short call vertical requires its own width. Maintenance substitutes current market value for entry proceeds, which is why the requirement climbs on its own as the option you sold gets dearer. 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 this structure is unusually exposed: three legs, six crossings, and a proof that survives only 23.88 points of slippage. The ICE FTSE 100 chain carries it; ICE UK single-stock series do not.
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 | −£6,255.04 | −£5,873.58 | £20,464.92 |
| −1 SD, IV 20% | 8,494.4 | −£2,216.99 | −£817.40 | £17,144.53 |
| Unchanged, IV 16% | 9,000.0 | £0.00 | +£1,238.78 | £12,473.43 |
| +1 SD, IV 14% | 9,505.6 | +£358.60 | +£238.78 | £9,904.00 |
| +2 SD, IV 13% | 10,011.2 | +£285.79 | +£238.78 | £9,743.18 |
| −20% gap, IV 45% | 7,200.0 | −£13,973.14 | −£13,761.22 | £26,996.42 |
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.
Read the table sideways. The two upside rows are the advertisement: a two-standard-deviation rally leaves the position in profit and reduces the margin requirement by 21.9%, which no short strangle can do. The downside rows are the trade. In each, the requirement rises while the equity falls — the mechanism by which short-premium accounts are closed by their broker rather than their trader — and one 20% gap costs 11.3 times the credit. 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 one session. A 20% overnight gap is not the tail of this distribution, it is the part that has already happened. The way this structure hurts people is subtler than a crash, though: it is the trader who reads “no upside risk”, files the position as defined-risk, sizes it like an iron condor, and finds on the one bad morning that the number under the put was never capped. If a 20% gap across your whole short-premium book would cost more than 10% of net liquidation value, the book is too big.
total credit > call spread width × multiplier. If it fails, this is not a jade lizard. It is a short strangle with a partial cap, and it must be sized, margined and managed as one.What to trade instead
Simpler, from the tier below: the bull put spread expresses the same bullish-to-neutral view with a floor under it. Buy an 8,600 put against the 8,700 and the maximum loss becomes a number you can write on the ticket, at the cost of most of the credit and all of the call-side income. For nearly every UK retail account that is the correct trade, and the £11,234.66 of buying power this lizard consumes will fund several of them.
Alongside, at this tier: the big lizard is the same idea with both short strikes at the money — roughly three times the credit, an easier proof to pass, and a downside that begins immediately rather than 300 points away. The short strangle is this structure with the long call removed: £479 more credit and an uncapped rally.
The variation worth knowing: the reverse jade lizard — short call, short put spread — removes the downside instead. On a normally skewed chain it is far harder to build, because the put spread you must buy is the expensive part — which is the skew telling you which risk the market pays you to take.
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. 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.