The problem is if it doesn't trend up then you are out the cost to set it up....over time these losses will negate gains so it will not perform as a stock replacement...at least from the mindset of an investor or swing trader where we view draw downs as opportunity to add to our positions not as losses.
Yes, that's a good point. But I don't average down. Either I was right on the direction or I wasn't, in which case I'll take the loss and move on. "Cut your losers and let your winners run," that sort of thing. If it's not your style that's cool too. Take care.
What's the benefit of this "stock replacement" strategy over a much simpler synthetic stock position (buy ATM call, sell ATM put) ? The latter is much simpler in terms of cash requirement (if it is an issue), probably margin requirement, no gamma, etc.; so the synthetic stock position is simpler and better with respect to pretty much everything?
I think you will sooner or later run into early assignment issues if you leverage or hedge with DITM calls or puts on equities, right? Not to mention the effective trading spreads might be higher than ATM.
Correct! Best used with European instruments like SPX & VIX options to have no assignment risk. Note: if normal equity options, even using ATM strikes on entry can become DITM (with assignment risk) if your timeframe is longer. -- If you have reliable idea of where the security will trade while in the position, you can tweak your entry strike to allow a longer time with some safety from assignment (reduce probability of assignment-by insuring strike will remain within x% of spot during your position).
The biggest advantage with ZEBRA compared to synthetic call is limited loss, you will loose what you put in