Another strategic way to gain exposure to Novo Nordisk's stock movement without directly owning the stock is by employing a zero extrinsic back ratio (ZEBRA). This options strategy involves buying two in-the-money (ITM) calls and selling one at-the-money (ATM) call. It is designed to mimic the behavior of owning the stock, with a delta around 1, providing near identical exposure to price changes.
Let's consider the example above. Novo Nordisk last traded at 188.88. To construct the ZEBRA, we sell one call with a strike of 180 and buy two calls with a strike of 145, both with an expiration of January 17th, 2025. This setup results in a position with a delta of 0.9987, indicating that the strategy will closely track Novo Nordisk's price movement. The strategy requires a net outlay of $86.70 per share (or $8,670 for a contract).
The potential reward of the ZEBRA strategy is similar to that of owning the stock: it profits if Novo Nordisk's price rises, providing virtually unlimited profit potential. And due to the delta being near one, the strategy should appreciate nearly dollar for dollar with any price increase in Novo Nordisk's stock.
However, unlike owning the stock, the ZEBRA strategy provides limited risk exposure. The maximum loss is the initial premium paid, which in this case is $86.70 per share. This risk profile is an advantage over buying the stock or synthetic share outright, where a substantial drop in the stock price could lead to much larger losses.
That being said, the ZEBRA strategy is best suited for investors who are bullish on Novo Nordisk's prospects and seek to mimic stock ownership without taking on the unlimited downside risk associated with it. As always, investors should consider their financial situation, risk tolerance, and investment objectives before initiating such a strategy.
Conclusion: Comparing Long Call, Synthetic Share, and ZEBRA Strategies
Choosing between the long call, synthetic share, and ZEBRA strategies depends on your investment goals, risk tolerance, and views on the future performance of Novo Nordisk's stock. Each of these strategies has its own set of advantages, disadvantages, and risk-return profiles. Therefore, the "best" strategy varies from one investor to another.
The long call strategy, with a delta of 0.6930, provides the benefit of limited risk and potentially unlimited reward. It offers a smaller exposure to changes in Novo Nordisk's stock price compared to the synthetic share and ZEBRA strategies, making it a more conservative choice. This strategy could be ideal for investors who anticipate a significant price increase in Novo Nordisk's stock but want to limit their risk exposure.
On the other hand, the synthetic share and ZEBRA strategies, both with deltas near 1, offer almost dollar-for-dollar exposure to changes in Novo Nordisk's stock price. They mimic the payoff of owning the actual stock without the need for the full capital outlay. However, they come with different risk profiles. The synthetic share strategy involves undefined risk due to the sold put, while the ZEBRA strategy caps the risk to the initial premium paid.
Investors may consider synthetic shares to increase their cash position without sacrificing their exposure to Novo Nordisk's stock. Meanwhile, the ZEBRA strategy might be attractive to investors who want to mimic stock ownership while capping their downside risk.
Ultimately, the choice between these strategies depends on individual investment objectives and risk tolerance. As with any investment decision, it is crucial to conduct thorough research and consider all the factors before initiating any of these strategies.
