Options Strategy Structures: ZEBRAs, Jade Lizards, and Broken Wing Butterflies Explained

Options traders sometimes seek structures that balance limited profit potential with reduced or asymmetric risk. Three such “uniquely layered” strategies are ZEBRAs, Jade Lizards, and Broken Wing Butterflies. Each strategy uses multiple option legs to illustrate specific payoff structures compared to basic single-leg strategies.

While they can offer certain cost advantages or tailored risk profiles, they may also introduce complexities in management, margin requirements, and liquidity. Understanding their construction, payoff patterns, and risk components can aid in grasping how they differ from basic spreads or straddles.

Also Read: Options Trading for Young Investors: An Educational Overview

Contents

• ZEBRA Strategy
  • Structure
  • Payoff Profile
  • Considerations
• Jade Lizard Strategy
  • Structure
  • Payoff Profile
  • Considerations
• Broken Wing Butterfly Strategy
  • Structure
  • Payoff Profile
  • Considerations
• Conclusion
• FAQs

ZEBRA Strategy

A ZEBRA seeks to profit from a narrow trading range by selling both calls and putting closer to the current price while buying protection further out. It resembles a condensed iron condor, aiming for time decay between the sold strikes.

Structure:

• Sell one out-of-the-money (OTM) call
• Buy one further-OTM call
• Sell one OTM put
• Buy one further-OTM put

The result is a four-leg structure resembling a short iron condor, but the sold strike is closer to the current price than the bought strike. The net premium received is typically small, and maximum profit occurs if the underlying stays between the two sold strikes at expiration.

Payoff Profile:

• Breakeven Points: Lower breakeven = sold put strike – net credit; upper breakeven = sold call strike + net credit.
• Profit Zone: Potential gain may occur if the underlying remains between the two sold strikes, subject to market behavior and implied volatility.
• Loss Zones: Outside the outer bought strikes, capped by the long options.

Considerations:

• Margin requirements may be higher than for a single spread due to simultaneous exposure to both calls and puts.
• Execution complexity increases with wider strike differentials.

Risk Disclaimer: Implied volatility shifts can affect all four legs, potentially widening theoretical losses.

Jade Lizard Strategy

The Jade Lizard combines a short put with a call spread to collect maximum credit with no upside risk. It’s popular when traders anticipate neutral to mildly bullish conditions.

Structure:

• Sell one OTM put
• Sell two OTM calls (higher strikes)
• Buy one further-OTM call

A Jade Lizard collects a net credit and is designed to eliminate upside risk beyond the long call strike, leaving only downside exposure.

Payoff Profile:

• Maximum Profit: The total credit received, achieved if the underlying remains at or above the short call strike at expiration.
• Risk Zone: Below the short put strike, where losses accrue linearly.
• No Upside Risk: The long call helps cap potential losses if the price rises sharply.

Considerations:

• High implied volatility environments may offer richer credits but also wider bid-ask spreads.
• Assignment risk exists on the short put and short call legs if in-the-money at expiration.

Risk Disclaimer: Downside risk is uncapped beyond the short put, so position sizing and strike selection are critical.

Broken Wing Butterfly Strategy

A Broken Wing Butterfly adjusts a classic butterfly spread to create asymmetrical wings, potentially netting a small credit or reducing debit. It’s often used when slight directional bias is expected.

Structure:

• Buy one in-the-money (ITM) call
• Sell two at-the-money (ATM) calls
• Buy one further-out-of-the-money call

The “broken wing” refers to the uneven distance between long strikes, creating an asymmetric payoff that can produce a small credit or a larger debit.

Payoff Profile:

• Maximum Profit: Achieved at the strike of the sold calls if the credits and debits net favorably.
• Wide Breakeven: One breakeven point often lies just below the lower strike, the other above the upper-bought strike.
• Asymmetric Losses: One side of the wings (usually the upside) offers more protection than the other.

Considerations:

• The structure may benefit from a decrease in implied volatility, but actual outcomes depend on multiple factors, including market conditions.
• Liquidity can be lower on wings, making fills more challenging and slippage more likely.

Risk Disclaimer: Complexity in strike spacing means theoretical risk must be modeled carefully; unintended directional bias can emerge.

Also Read: Options Trading for Small Businesses: A Risk Management Perspective

Conclusion

These three strategies, ZEBRAs, Jade Lizards, and Broken Wing Butterflies, demonstrate how combining calls and puts in multi-leg configurations can create nuanced payoff diagrams. While each can offer defined profit ranges or reduced exposure in one direction, they also involve execution complexities, sensitivity to volatility, and margin considerations that should be carefully understood. Before considering any engagement, a clear grasp of their structure, breakeven points, and sensitivity to volatility is essential.

Disclaimer: Investment in the securities market is subject to market risks. Please read all scheme-related documents carefully before investing. The information provided in this article is for educational and informational purposes only and is not intended as investment advice. Trading in derivatives, including options, involves substantial risk and is not suitable for all investors. Past performance is not indicative of future results. Readers are advised to consult with their financial advisors before making any trading decisions.

FAQs