ZEBRA (zero extrinsic back ratio)

Summary

Use a ZEBRA when you think XYZ will rise and want the move of 100 shares with almost no time value to lose: buy two $96 calls at $5.76 and sell one $100 call at $3.45, paying $807. The gain has no limit above $100, and the most you can lose is the $807, which happens at $96 or below, a 4% fall. You break even at $100.07, 7 cents above the $100 strike.

Key terms

ZEBRA

Zero extrinsic back ratio: buying two in-the-money calls and selling one at the current price so the time values nearly cancel.

extrinsic value

Another name for time value, the part of an option's price above what it is already worth.

back ratio

A position that buys more options than it sells, here two calls bought for one sold.

intrinsic value

The part of an option's price you could collect right now by using it.

time value

The rest of an option's price, paid for the chance things get better before the end, and gone by the last day.

delta

How much an option's price moves for a $1 move in the stock, and a rough guide to the chance it finishes in the money.

break-even

The stock price on the last day where you neither make nor lose money: strike plus premium for a call, strike minus premium for a put.