Stock Replacement Strategy

Type of Strategy

trading     /     investing



implied volatility

low iv environment preferred

Probability of Profit



The ZEBRA strategy acts as a limited-term stock replacement strategy with defined risk.

The ZEBRA term stands for Zero Extrinsic Back Ratio, a specific application of a back ratio spread as defined by Tastytrade, Inc.  The strategy requires active management.

SOI recommends against ZEBRA spreads for investors due to the poor risk/reward payoff at expiration and the complexity of managing the spread for optimal benefit as share price fluctuates.  A ZEBRA spread loses more value on a move against the spread than it makes on an equivalent favorable move, especially as expiration nears.  If managed closely, however, a price move against the spread can be managed for approximately a 1:1 loss ratio well before expiration nears.

To its advantage, the ZEBRA spread generally employs about ten percent of the capital required for a short-term long stock position at its recommended duration (30-45 DTE) and it is risk defined with the ten percent debit as the maximum loss.  As duration is increased, the debit required also increases.


ZEBRA spreads are back ratio spreads, which are not generally recommended by SOI.

In constructing ZEBRAs, long stock replication uses call options while short stock uses put options.

First, one ATM option is sold.  Then, two higher delta, ITM options are purchased such that the extrinsic value (time premium) of the purchased options is covered by the extrinsic value (time premium) of the short option.  Hence, net extrinsic value should be zero in the ZEBRA.  The entire spread will be purchased at a debit, which is the maximum loss with the spread.  A standard setup may approximate selling a 50-delta option (ATM) and purchasing two 70-delta options, although individual stocks will vary based on characteristics.

Since risk/reward ratios worsen near expiration, traders should exit/roll ZEBRAs well-before expiry.

Example – Microsoft (MSFT)

Trader / Investor wishes to simulate a long position in Microsoft (MSFT) for a duration of approximately 60 days.  In this transaction, the trader wants a defined risk position with limited capital use.  The trader selects a ZEBRA spread for this position.  MSFT Stock is at $234.

Zebra Stock Replacement – MSFT

1) In an offensive account (tax-free), sell one 58 DTE, 50 delta call at $235 strike for $9.00.  Note EV=$9.00

2) In an offensive account (tax-free), buy two 58 DTE, 70 delta calls at $220 strike for $18.50 each.  Note EV=$4.50 per call

3) Total debit paid = $28.00 (12% of long stock capital)  Breakeven = $234  Max Loss = $28

4) Extrinsic value: Purchased 2 x $4.50 = $9.00      Sold = $9.00  Net EV = $0


Note chart payoff – the steeper loss curve on the payoff diagram at expiration.

Directional Payoffs (worsen near expiration … reduced impact with greater time to expiry):

1) With long stock, a $5 move in either direction results in a gain/loss of +$5 / -$5

2) With the ZEBRA, at expiration, a $5 move in either direction results in a gain/loss of ~ +$5 / ~ -$10

3) With the ZEBRA, the maximum loss is $28, occurring at a price of $220 at expiry ( – $14 price move)


Prior to expiration, the ZEBRA can be managed for more beneficial risk/reward ratios.  If the stock moves against the position, the long options will gain extrinsic value faster than the short option loses extrinsic value.  The trader can then re-center the ZEBRA, reducing losses compared to the expiry loss potential of 2x the price move.  While this management may increase the capital in the trade, the performance of the strategy can prove beneficial vs. unmanaged losses.  Note that as expiry nears, the trader loses this opportunity to beneficially manage extrinsic value.