What is a Reverse Jade Lizard?
Sell 1 OTM Call
Generates premium but creates substantial upside risk if uncovered.
Sell Put Spread
Sell a higher-strike put and buy a lower-strike put to define downside risk.
Mental model: “Collect premium from both sides, but cap the downside with a long put.”
Core structure
| Leg | Action | Example Strike |
|---|---|---|
| 1 | Buy to Open Put | $90 Put |
| 2 | Sell to Open Put | $95 Put |
| 3 | Sell to Open Call | $110 Call |
All options use the same expiration.
When to use it
| Situation | Fit? | Why |
|---|---|---|
| Neutral to moderately bearish | Good fit | You want the stock to stay below the short call and ideally above the short put. |
| Want premium income | Good fit | You collect premium from the short call and short put. |
| Want defined downside risk | Good fit | The long put caps the downside spread loss. |
| Expect a sharp rally | Poor fit | The naked short call creates large upside risk. |
| Want fully defined risk on both sides | Poor fit | The upside remains undefined unless a long call is added. |
Worked example
Assume a stock trades near $100.
| Leg | Strike | Premium |
|---|---|---|
| Buy Put | $90 | Pay $1.00 = -$100 |
| Sell Put | $95 | Receive $3.00 = +$300 |
| Sell Call | $110 | Receive $3.00 = +$300 |
Total Credit = $3.00 + $3.00 - $1.00 = $5.00/share
Total Credit = $500
The key Reverse Jade Lizard rule
The put-spread width is:
$95 - $90 = $5
The total credit is also:
$5.00/share
If Total Credit ≥ Put-Spread Width, there is no downside loss at expiration.
Maximum profit
Maximum profit is the total premium received if the stock finishes between the short put and short call.
Maximum Profit = Total Credit = $500
Best expiration zone in this example: between $95 and $110.
Upper break-even
Upper Break-even = Short Call Strike + Total Credit
Upper Break-even = $110 + $5 = $115
Above $115, losses grow as the stock continues rising.
What happens on the downside?
Below $95, the short put starts losing value, but the long $90 put caps that spread loss.
Maximum Put-Spread Loss = ($95 - $90) × 100 = $500
Because the trade collected $500 total credit:
Downside Net Result at or below $90 = $500 Credit - $500 Put Spread Loss = $0
So in this example, there is no downside loss at expiration.
What happens at expiration?
| Stock Price | Approximate Outcome |
|---|---|
| $80 | Approximately $0 in this example |
| $90 | Approximately $0 |
| $95 | +$500 max profit |
| $100 | +$500 max profit |
| $110 | +$500 max profit |
| $115 | Upper break-even |
| $130 | Large loss from short call |
The biggest risk: upside
The short call is not protected by a long call.
If the stock rallies sharply, the Reverse Jade Lizard can lose heavily because the uncovered short call has theoretically unlimited loss potential.
Reverse Jade Lizard vs. Jade Lizard
| Feature | Reverse Jade Lizard | Jade Lizard |
|---|---|---|
| Market bias | Neutral to bearish | Neutral to bullish |
| Uncovered leg | Short call | Short put |
| Defined side | Downside | Upside |
| Main tail risk | Sharp rally | Sharp decline |
Reverse Jade Lizard vs. Iron Condor
| Feature | Reverse Jade Lizard | Iron Condor |
|---|---|---|
| Protective put | Yes | Yes |
| Protective call | No | Yes |
| Downside risk | Defined | Defined |
| Upside risk | Undefined | Defined |
| Credit potential | Usually higher | Usually lower |
An Iron Condor is the more fully defined-risk version because it adds a protective long call.
Assignment risk
Short Put
Can be assigned, though the long put defines downside spread risk.
Short Call
Can be assigned and may create a short-stock position if uncovered.
The short call is the key operational risk because assignment can create a short-stock obligation.
Pros and cons
Pros
- Large premium potential.
- Defined downside risk.
- Can be structured with no downside loss.
- Time decay often helps.
- More controlled than a naked Short Strangle on the downside.
Cons
- Undefined upside risk remains.
- Short-call assignment risk.
- Margin can expand sharply on a rally.
- Three legs increase complexity.
- A large upside move can overwhelm collected premium.
How to close it
Close as one three-leg order when possible.
Close: Sell to Close the long put + Buy to Close the short put + Buy to Close the short call.
Profit = Opening Credit - Cost to Close
Common mistakes
- Assuming “no downside risk” means the whole trade is low risk.
- Ignoring the theoretically unlimited short-call risk.
- Failing to verify that credit is at least equal to the put-spread width.
- Using the strategy before a major upside catalyst.
- Ignoring margin expansion during a rally.
- Not planning for short-call assignment.
Beginner checklist
| Check | Question |
|---|---|
| ☐ Market view | Am I neutral to moderately bearish? |
| ☐ Put width | What is the width of the bull put spread? |
| ☐ Total credit | Is it at least as large as the put-spread width? |
| ☐ Upper break-even | How far can the stock rise before I lose money? |
| ☐ Assignment | What happens if the short call is assigned? |
| ☐ Margin | Can my account handle a sharp upside move? |
| ☐ Events | Are earnings or major upside catalysts inside the trade window? |
| ☐ Alternative | Would an Iron Condor better match my risk tolerance? |
Key takeaway
Reverse Jade Lizard = Short Call + Bull Put Spread
Use it when you want premium income with a neutral-to-bearish outlook and want to define downside risk.
The central trade-off is: defined downside, but substantial and theoretically unlimited upside risk from the uncovered call.