The Zebra Option Strategy: A Simple Explainer

The Zebra option strategy simplifies managing directional risk in the market and represents a nice way to replicate stock ownership without heavy investments. Whether you lean bearish with a put Zebra or bullish with a call Zebra, this approach strips away extrinsic value for a more cost-effective and risk-managed trading experience, mirroring the benefits of married puts or calls, but with a twist. Today's guide will tell you more about this strategy family.

Key takeaways

• The Zebra option strategy replicates stock ownership without requiring a high capital outlay. You can set up a bearish (put Zebra) or bullish (call Zebra) strategy.
• The Zebra strategy removes extrinsic value, which results in a cost-effective approach to capitalizing on market movements and includes inherent risk management with an integrated stop-loss feature.
• These strategies look like a simple married put or married call, only without extrinsic value.

Understanding the Put and Call Zebra Strategies

Zebra strategies are not so famous, yet they offer a relatively powerful approach for those looking to leverage market movements without the full risk of direct stock ownership. The first thing you should know is that the term “Zebra” is an acronym for “zero extrinsic value back ratio spread.” The main idea of zebra option strategies is to utilize zero extrinsic value back ratio spreads to achieve a near-100 delta, making them an attractive choice for both bullish and bearish positions (in other words, this is clearly a directional strategy). To execute a put zebra, the trader needs to:

• Buy 2 ITM puts
• Sell 1 ATM put (which will remove all extrinsic value)

Here is how it looks:

On the other side, to set up a call zebra you will:

• Buy 2 ITM calls
• Sell 1 ATM call (which will remove all extrinsic value)

These setups allow traders to mirror the profit and loss potential of owning or shorting 100 shares, but with significantly reduced risk and capital outlay. As you may easily guess, the put zebra will give you a profit in a sufficiently bearish market when you expect the stock's price to decrease. This zero extrinsic value back ratio spread strategy acts similarly to a married call, where the maximum loss is limited to the debit paid upfront, and we go short on 100 shares of the underlying company.

The call zebra works exactly in the opposite way. You'll open it if you are bullish on a particular stock, anticipating its price to rise. It works more or less like a married put, with the maximum loss capped at the initial debit, and we have a long position of 100 shares on the underlying company.

To understand the difference between the put and call zebra option strategy, you'll pretty much need to focus on their directional assumptions and ideal market conditions for profit.

Put zebras are good in bearish environments with low implied volatility, allowing traders to bet against a stock with minimized risk. Call zebras are best suited for bullish scenarios, again with low implied volatility, enabling traders to capitalize on upward movements without the full financial exposure of buying shares outright.

What’s in it for you? With a zebra option strategy, you gain the ability to profit from significant stock movements—up or down—with a predefined risk level. Think of a stock that has moved up by a lot recently, with many people debating over its potential to reach even higher levels and a potential for excessive speculation. In these cases, a call zebra can still let you earn very good profits if the stock’s bullish run goes on, while it will reduce your losses if things go bad.

The table below will give you a quick comparison between a put and a call zebra option strategy:

How Zebra Strategies Relate to Married Calls and Married Puts

In the previous section, we mentioned that there is some sort of common ground between zebra strategies and married calls or puts. This is true, but the zebra option strategy stands out by offering a more cost-effective alternative to these traditional strategies.

The key difference lies in how a zebra option strategy avoids extrinsic value payments. When you set up a zebra strategy—be it a put or call—you're essentially creating a position that mimics owning or shorting 100 shares of stock with a lower cost for you.

By buying two in-the-money options and selling one at-the-money option, you offset the extrinsic value completely. This means you're not paying for the time value that typically comes with options.

Risk management is another good point to make about a zebra option strategy. Both married calls and puts include an element of protection for your stock positions, acting as a form of insurance against significant losses. However, zebra strategies go a step further by integrating this protective stop-loss feature directly into the setup. What we mean here is that this embedded stop-loss is achieved without requiring you to go long or short on any stocks, giving you a clear advantage over married strategies.

What about the time horizon of your investment? When considering long-term versus short-term investment horizons, zebra strategies offer flexibility that married calls and puts might not.

For short-term movements, a zebra can be set up with near-term expirations to capitalize on quick market shifts with limited risk. On the other hand, for those looking at longer-term positions, choosing zebra strategies with longer-dated options can mimic the experience of holding stocks due to a very high delta, but with reduced capital outlay and capped losses.

Its adaptability makes this zebra option strategy an attractive idea for traders and investors aiming for both short-term gains and long-term growth, offering a versatile tool in their investment toolkit.

So, in general, there are several upsides to married strategies, such as:

1. You can base your strategy on a stock that has a dividend and earn the right to receive it
2. You can risk less money in the trade.

We can say that what’s good about zebra strategies compared to the married setup is that:

1. You will need less capital
2. The breakeven price is closer
3. The bear case is less risky.

An Example of Put Zebra

Let’s look at a real-world example of the zebra option strategy in action using Boeing (BA). Suppose you've been following BA and believe the stock is poised to decline over the next several weeks. You’d like to benefit from this bearish move while still keeping your risk defined. A put zebra strategy fits this outlook perfectly.

With BA currently trading near $202.36, you could build a put zebra by buying two $190 puts and selling one $180 put, all expiring in 2 months. Here's how the trade looks:

• Buy two $190 puts
• Sell one $180 put

Here’s what the profit and loss (P&L) profile looks like:

The maximum loss is limited to the $645 you pay to enter the trade. That’s your worst-case scenario, which occurs if BA finishes above $190 at expiration. But as the price of BA drops below $190, your position becomes increasingly profitable. This structure closely mimics the payoff of shorting 100 shares, without the need for margin or taking on unlimited risk.

Even better, this trade was found using our custom scan feature on our options screener, which allows you to search the market for advanced multi-leg strategies like the zebra. It’s one of the most powerful screening tools available, designed to help you discover trades most platforms can’t show you.

This put zebra gives you high delta exposure with limited downside and no margin risk. It’s a strategic way to express a bearish view on a stock while keeping your risk profile clean and capital-efficient.

In any case, remember that options trading lets you benefit from different market scenarios, from bull to bear, and even in sideways markets (just think of what you can achieve with the iron butterfly option strategy.

An Example of Call Zebra

Let’s walk through a real-world example of the zebra option strategy in action - this time, with a call zebra on Boeing (BA). Suppose now that you've been tracking BA and believe it has room to move higher over the next couple of months. You want to benefit from the upside, but without putting up the capital needed to buy 100 shares or exposing yourself to unlimited downside. A call zebra is a great fit for this scenario.

With BA currently trading around $202.36, you could build a call zebra by buying two in-the-money calls and selling one at-the-money call. In this case, all options expire in about two months. Here’s the setup:

• Buy two $220 calls
• Sell one $230 call

Here’s what the profit and loss (P&L) profile looks like:

The maximum risk here is limited to $523, which is the total cost to open the trade. That’s your worst-case outcome if BA finishes below $220 at expiration. But if BA rallies, you get near-stock-like upside exposure starting from just above $222. That means the strategy gives you high delta without tying up a large amount of capital.

This is another trade we found with our custom scan feature, which lets you screen the entire market for advanced multi-leg setups like the zebra - something most platforms can’t do.

This call zebra on BA is a capital-light way to express a bullish view while keeping downside capped and avoiding the cost and risk of long stock ownership.

Remember: another great way to limit your risk (usually with a very high profit ratio potential) is to follow the way we normally use the broken wing butterfly option strategy.