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Jade lizard explained: a short put with the upside taken out

A jade lizard is three legs: one short put below the stock, and a short call spread above it. Size the credit bigger than the call spread is wide and there is nothing left to lose on a rally. The whole risk moves to the downside, where it was already.

Options guide · 11-minute read · Updated 2026-10-29

The three legs

A jade lizard is a short strangle with the open-ended side closed off.

1. Sell a Put option below the stock price. Same job as a cash-secured put: you are paid to agree to buy shares lower.
2. Sell a Call option above the stock price.
3. Buy a further-out call above that one. Legs 2 and 3 together are a call credit spread.

That third leg is the whole trick. It caps what the call side can ever cost you, and the cap is a number you choose when you open the trade.

How the upside risk disappears

The call spread can only lose the distance between its two strikes, times 100. That is its width. If the stock goes to the moon, the short call loses and the long call wins, and the difference stops at the width.

So compare two numbers:

• the total credit you collected across all three legs;
• the width of the call spread, times 100.

If the credit is bigger than the width, a rally above the upper call strike still leaves you with money. The call spread takes its full loss and the leftover credit is yours.

That is all the "no upside risk" claim means. It is arithmetic you set up at the start, not a feature of the strategy. Build the same three legs with a credit smaller than the width and the upside risk is right back.

A worked example, and the downside gets us (hypothetical)

Granite Valley Foods, a made-up stock, trades at $50. You would own it at $45. Forty-five days out, you open a jade lizard.

Now the two checks:

• Call spread width: $57.50 − $55 = $2.50, so $250.
• Credit $270 is bigger than $250. Nothing to lose above $57.50. The floor up there is +$20.
• Downside break-even: $45 − $2.70 = $42.30.
• Max gain: $270, anywhere between $45 and $55.

Six weeks later Granite Valley misses its numbers and guides lower. The stock finishes expiry at $38.

• The call spread expires worthless. Both calls are far away. Nothing to pay.
• The $45 put is $7 in the money. You are assigned: you buy 100 shares at $45, worth $38, so the shares are −$700.
• You keep the $270 credit.

Net result: −$430. You now own 100 shares of a stock that just missed.

Check it a second way: the stock finished $4.30 below the $42.30 break-even, and 4.30 × 100 = $430. Same number.

The upside protection did its job perfectly. It was pointing the wrong way.

Every outcome at expiry

Same trade: $45 put, $55/$57.50 call spread, $2.70 total credit (hypothetical).

The last three rows are the point of the strategy. The last three rows are also the smallest numbers on the table.

So what did the third leg really buy you?

It moved a small amount of money away from the rally case and left the downside untouched.

Read the $38 row twice. The jade lizard loses more than the strangle on the downside, because it paid $30 for the long call and that $30 came out of the cushion. You bought away the open-ended risk and the bill arrived on the side that was always going to hurt you.

That is a trade worth making. Just know what you traded. More on how the family fits together in option strategies beyond the wheel.

What it ties up, and who can trade it

The short put is the capital. Set aside $4,500 if you want it cash-secured, exactly as you would for a plain short put — and treat it like a decision to buy 100 shares at $45, because that is what it is. The call spread needs very little on its own: brokers usually hold the width, $250 here, minus the spread's own credit.

The call spread leg is what raises the approval level. Most brokers put multi-leg spreads a step above covered calls and cash-secured puts, and in Canada spreads are often refused in a registered account such as a TFSA or RRSP, so check what your own broker allows before you plan around one.

How sellers choose the strikes

1. Pick the put first. It is the real position. A strike you would genuinely buy shares at, on a company you would own — the same test as the one in the wheel strategy.
2. Then pick the call spread width. Narrower width means a smaller number to beat with your credit. A $2.50 width needs $2.50 of total credit; a $5.00 width needs $5.00, which usually means selling a call so close to the money that you are no longer neutral.
3. Add the three premiums and check the credit against the width. If it is short, go narrower on the calls or closer in with the put. Do not go further out on the long call to save thirty cents — that widens the spread and makes the target bigger.
4. Work the downside break-even and the loss at a price the stock could really reach. If that number is uncomfortable, trade one fewer contract.

If the credit will not beat the width on a stock you actually want, the honest answer is that this is not a jade lizard today. Sell the put on its own.

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