A short put plus a short call spread, sized so the total credit exceeds the call spread's width — which removes upside risk entirely.
The construction is deliberate. Sell an out-of-the-money put, sell an out-of-the-money call, and buy a further call to cap the upside. If the credit collected is larger than the width of the call spread, there is no possible loss above the market, no matter how far the underlying runs.
What remains is downside risk, which behaves exactly like a cash-secured-put below the short put strike. That makes the jade lizard a way to sell a put while turning the call side into free premium, and it works best when the volatility-skew makes puts rich and calls modest.
Example: XYZ at $50. Sell the $45 put at $0.90, sell the $55 call at $0.80, buy the $56 call at $0.50. Total credit $1.20 against a $1.00 call spread width, so above $56 the position still keeps $0.20 no matter how far XYZ runs. Everything that can go wrong is below $45.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Buying a call: payoff at expiry. A 105-strike call bought for 3 loses that whole 3 if the price finishes at or below 105, breaks even at 108, then gains a dollar for every dollar higher. The loss is capped at the premium; the upside is not capped.The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.
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