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April 29, 2022
Economy Shrinks In Q1
It’s Friday, so let’s start off by showcasing the economic dashboard.
Let’s take a look at some of the key numbers. The yield curve inverted in early April and climbed upward a bit through mid-April up to .39%, but is now hovering around .24%. While jobless claims are higher than the 4-week moving average, they remain at historic lows.
New home sales decreased this month by 8.6%, but the 763k homes were still in line with the 765k estimate. New home sales still have a positive trend going back to 2010, but still something to watch out for.
Overall the economy shrank last quarter for the first time since the pandemic recession two years ago. It shrank by 1.4% but consumers and businesses kept spending this past quarter by 3.7% after adjusting for inflation. Wages have been rising steadily as companies are competing to attract and retain workers, and that has helped consumers’ ability to spend, but of course, that’s not helping the inflation problem. That may mean there is some strength in the economy and the possibility to avoid a recession.
The Economic Dashboard is still telling us to be cautious.
TRADE IDEA
We’re going to go over the Jade Lizard in the Trading Education section, so today’s trade idea is a Jade Lizard on the beaten-up Netflix stock.
NFLX
Sell to open 17 JUN 22 $230 call
Buy to open 17 JUN 22 $235 call
Sell to open 17 JUN 22 $165 put
Credit received: $6.76 (as of 4/28)
Max profit: $6.76 (credit received)
Buying Power Effect: $15,835.95
Break Even: $158.39 (17% decline from the current price of $192.98)
Probability of Profit: 76.32%
Rational: Large 30%+ loss in a couple of days due to poor earnings. The June expected move is +/- $36. If you trust the probabilities, that means there’s roughly a 70% chance of the stock staying within the expected move and our break-even is right at the lower edge of the expected move.
MARKETS
At one point the Dow was up over 500 pts on Thursday with tech stocks like QCOM, NVDA, and MU all helping to boost the market. Meta Platforms (FB), a Metaverse fav, was up over 17%. It’s still been a tough week and month overall.
TRADING EDUCATION
Today we’re going to look at the Jade Lizard, as requested by one of our readers. If you’re neutral or slightly bullish on a stock, a Jade Lizard is an options strategy that offers you no upside risk, and the risk to the downside risk is similar to selling a naked put.
What is a Jade Lizard? There are two parts. The first part is a naked put and the second part is a call spread.
In the example from the Trade Idea section above, I mentioned that NFLX has been beaten down lately and there may be a slight rebound in the future. You may not agree, but that’s the assumption for this example.
If we go out to the June options we see the expected move is $36 and the current price is $192.
The expected move can usually be found at the top of the options chain (in TOS and TrastyTrade). 
Take the current price and subtract the expected move and then I’d look to sell the nearest put, which would be the $155 put. However the premium wasn’t where it needed to be, so I bumped it up to $165 to make the rest of the trade work.The $155 put didn’t have enough premium to make it a zero risk to the upside trade.
The next step is the call credit spread. The best practice is to look to sell a call between a .20 and .30 delta and then buy the next strike price up for protection. In this case, the $230 call was at .29 delta and that worked with the premium received to get the risk graph to be the way it looks in the picture above.
The total credit received for everything must be greater than the width of the call spread.
From the chart below you can see that as long as the stock finishes above $158, we will make money on this trade. If the stock trades above $235, our max profit is reduced, but $235 is outside of the expected move.
It is best to use this strategy only when the implied volatility environment is high.
Another way to think about a Jade Lizard is that it’s just an iron condor minus the put protection leg. So why use a Jade Lizard?
If you’re neutral to bullish on a stock and you’re used to selling puts to collect premium, you can collect more premium by selling the additional call spread. When the trade works in your favor, time decay and neutral price action can make these trades profitable quickly.
As far as timing goes I like going a little further out, like 45 days to expiration but you should paper trade different time frames to get a sense of how they react to time and price action. I’ve got some market timing ideas to discuss next week. You don’t want to miss it.
Make sure you’re set to keep getting these emails by adding [email protected] to your contacts/approved senders list. If you have any questions, comments, or anything we can help with, reach us at any time.
Another way to think about a Jade Lizard is that it’s just an iron condor minus the put protection leg. So why use a Jade Lizard?
If you’re neutral to bullish on a stock and you’re used to selling puts to collect premium, you can collect more premium by selling the additional call spread. When the trade works in your favor, time decay and neutral price action can make these trades profitable quickly.
As far as timing goes I like going a little further out, like 45 days to expiration but you should paper trade different time frames to get a sense of how they react to time and price action. I’ve got some market timing ideas to discuss next week. You don’t want to miss it.
Make sure you’re set to keep getting these emails by adding [email protected] to your contacts/approved senders list. If you have any questions, comments, or anything we can help with, reach us at any time.
Jeff
Editor, Wealthy Investor Society