Trade Strong Stocks with Defined Risk - The ZEBRA Strategy

Many traders use long calls to get exposure to stocks they like, but those calls may expire worthless unless the stock moves significantly. Owning shares solves that, but requires more capital and comes with full downside risk. The ZEBRA (Zero Extrinsic Back Ratio) offers a smarter middle ground, giving you stock-like upside, limited risk, and, if opened in the right way, a relatively close breakeven point. This is one of the many strategies you can find with our Custom Strategy Scanner.

Key Takeaways

• The long ZEBRA strategy offers upside exposure similar to shares, with lower cost and capped downside. To build the strategy, you buy 2 ITM calls and sell 1 OTM call.
• The trade often starts profiting from the first small move upward, thanks to a tight breakeven.
• You can screen the whole market for the ZEBRA strategy with our custom scan feature.

Two Classic Bullish Moves: Buying Shares or Opening a Long Call

When you’re bullish on a stock, you typically choose between buying shares or opening a long call. Buying shares gives you full upside exposure, but requires significant capital and carries full downside risk. The typical P&L of buying shares is a simple line:

A long call, on the other hand, costs much less upfront and offers unlimited upside, but the stock must rise enough to cover the premium paid, or the option expires worthless. In this case, your P&L shape has the following shape:

Each approach has trade-offs: shares are capital-intensive but reliable, while long calls are cheap but less forgiving (if the underlying price does not go above your breakeven point by expiration, you will lose money). The ZEBRA structure tries to combine the best of both (and we’d say it does a pretty good job), as we explain in the following section.

What Is a ZEBRA?

The typical ZEBRA setup includes two legs:

• You buy 2 ITM calls
• You sell 1 OTM call

The typical P&L of your strategy will have this shape (we have highlighted the long and short strike prices to make this simpler to read):

Notice that, because the long calls are deep ITM, you remove most of the time value. The trade starts acting like a stock, with gains almost immediately as the underlying rises.

But here’s the key difference: your loss is capped at the net debit. So instead of risking full downside like with shares, you know exactly how much you could lose, even in a nightmare scenario (which is a factor that may want you to prefer buying a call options vs buying shares).

Why Not Just Buy a Long Call or Shares?

Let us compare the 3 strategies in a simple table:

While long calls are cheaper, they require a large move just to break even. Many expire worthless, especially if the timing isn’t perfect. 

ZEBRA fixes this problem:

• Starts profiting from the first upward move
• Covers more delta than a single call
• Limits your downside to a predefined level
• Has an uncapped upside if the stock rallies

We’ve previously backtested long-term calls vs. stock and found that options with built-in leverage tend to outperform - especially on strong companies (we’re adding a link at the bottom of the article on this specific study). The ZEBRA follows the same logic, but improves the payoff curve.

How to Build a Long ZEBRA Scan

It is really easy to create your own long ZEBRA screening system with our custom scan feature. Just follow these steps:

1. Select “New Scan”
2. Choose “Custom” as the strategy type
3. Add two legs in this exact order:
    • 1st leg: Buy 2 ITM Calls (same strike and expiration)
    • 2nd leg: Sell 1 OTM Call (same expiration)

4. Add filters such as:
5. 1. Breakeven Percent #1: From -3% to +3% To find trades that start profiting from a small upward move.
   2. Max Loss: Below $1,000, to keep total risk defined and manageable.
   3. Max Loss %: Below 30%, to ensure the position has favorable leverage vs capital used.
   4. Stock Score Fundamental & Growth: Above 5, to target fundamentally strong companies with solid growth metrics.
   5. Days to Expiration: Long (60–120 days), to give the position enough time to play out without rushing the move.
   6. Total Option Volume: Above 5,000, to ensure liquidity when entering or exiting the trade.
   7. … and more!

As an alternative, you could refer to the predefined scan we designed for this strategy (you could also duplicate it and edit it for yourself). We’re leaving a link to the scan at the bottom of the article.

Example ZEBRA Payoff

Let’s say JD is currently trading around $33. Suppose you like this company, so you build a ZEBRA with the following setup:

• Buy 2x $30 calls
• Sell 1x $33 call
• Expiration: 3 months from now

Your P&L chart would look like this:

This structure acts like 100 shares, but with a defined loss of a little more than $600 instead of risking the full stock value. If JD rises even slightly above the current price, the trade turns profitable immediately.

Even better, if the stock climbs close to its analyst target (let’s say 5% below it), this setup could return over $1,500 - a high-leverage result, with risk locked in.

Read More

• Our blog article on the ZEBRA strategy (The Zebra Option Strategy: A Simple Explainer)
• Our custom scan feature guide (Custom Options Strategy Screener)
• Our study that compares buying shares vs buying calls over the long term (Gain a Market Edge with Leap Options: Long-Term Strategies and Stock Comparisons [Using LEAPS for Optimized Returns])
• Our predefined scan on the long ZEBRA strategy (Medium-Term ZEBRA on Strong Stocks (Long Call Replacement))
• Try this strategy in our options screener