Advanced Strategies: ZEBRAs
ZEBRA stands for Zero Extrinsic Back Ratio. It uses two deep-in-the-money calls and one short call to create a stock-like position with less capital and lower theta decay.
Before You Trade
These examples and charts are simplified teaching models. Confirm live pricing, liquidity, and assignment risk in your broker before placing real trades.
Stock substitute
High delta exposure without full share cost
A ZEBRA is designed to behave like 100 shares of stock but with less cash. The short call offsets extrinsic value on the two long calls, making the position mostly intrinsic.
Example ZEBRA on a $100 stock: buy 2x 90 calls, sell 1x 100 call, $10 debit.
Illustrative example only: chart values are simplified to teach mechanics and are not live quotes or trade forecasts.
Structure
2 long ITM calls, 1 short ATM call
By choosing deep ITM calls with high delta, the position starts around 1.0 delta overall. The short call reduces extrinsic cost, making theta close to zero.
Why it works
Greeks
Delta drives the move, theta stays small
ZEBRAs are built for directional moves. Delta is close to 1.0, gamma is modest, and theta is small because the short call pays for the long calls' time value.
Delta stays near 1.0 as price rises, while theta remains close to zero.
Illustrative example only: chart values are simplified to teach mechanics and are not live quotes or trade forecasts.
Typical Greek mix for a ZEBRA position.
Illustrative example only: chart values are simplified to teach mechanics and are not live quotes or trade forecasts.
When They Shine
Bullish thesis with capital efficiency
ZEBRAs are great when you want stock-like exposure but prefer defined cost and smaller theta decay. They can replace long stock in accounts that favor options or need lower capital outlay.
Example use case
Who This Is For
Traders looking for a capital-efficient stock replacement that mimics 100 shares with lower cost and minimal time decay.
Learning Objectives
- • Explain what ZEBRA stands for (Zero Extrinsic Back Ratio) and why it matters.
- • Describe the structure: 2 deep ITM long calls + 1 short ATM call.
- • Understand why the position has near-zero theta and near-1.0 delta.
- • Identify when a ZEBRA is preferable to buying 100 shares of stock.
Risk Note
A ZEBRA has defined risk—your max loss is the debit paid. However, if the stock drops significantly below the long call strikes, the entire debit can be lost. Additionally, the short call caps gains above its strike, so extremely large rallies produce less profit than owning shares outright.
Example Walkthrough
Scenario: XYZ is at $100. You buy 2 deep ITM $90 calls for $11.50 each and sell 1 ATM $100 call for $3.00. Net debit: ($11.50 × 2) − $3.00 = $20.00 ($2,000 total vs. $10,000 for 100 shares).
Best case: XYZ rises to $110
Long calls: 2 × ($110 − $90) = $40. Short call: −($110 − $100) = −$10. Net value = $30. Profit = ($30 − $20) × 100 = +$1,000. Same as owning 100 shares ($10 gain), but with $8,000 less capital.
Worst case: XYZ drops to $85
Both $90 long calls are out-of-the-money, so intrinsic value is $0 (calls cannot have negative intrinsic value). The short $100 call also expires worthless. Position value is near $0, so max loss is the debit paid: −$2,000. With shares, you would have lost $1,500 but still own the stock.
Key tradeoff: The ZEBRA uses 80% less capital and has similar upside to stock, but your max loss is the full debit and you lose if the stock drops sharply.
Common Mistakes
Using strikes that are not deep enough ITM
If the long calls are not deep ITM, they carry significant extrinsic value. The short call cannot fully offset it, leaving theta exposure.
Forgetting the ZEBRA has an expiration
Unlike stock, a ZEBRA expires. If the stock is flat for months, the position can erode in value. Plan for an exit or roll before too much time passes.
Ignoring the short call cap
Above the short call strike, gains are reduced because the short call offsets the extra long call. This is the cost of lower capital outlay.
Quick Recap
- • A ZEBRA (2 long deep ITM calls + 1 short ATM call) mimics stock ownership with less capital and near-zero theta.
- • Delta is close to 1.0, so the position moves almost dollar-for-dollar with the stock.
- • Max loss is the debit paid, making risk defined—but the position expires, unlike stock. Plan accordingly.
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