Zero Cost Collar Definition | zero collar option
WhatisaZeroCostCollar?Azerocostcollarisaformofoptionscollar[1]strategytoprotectatraderslossesbypurchasingcallandputoptionsthatcanceleachotherout.Thedownsideofthisstrategyisthatprofitsarecapped,iftheunderlyingassetspriceincreases.Azerocostcollarstrategyinvolvestheoutlayofmoneyononehalfofthestrategyoffsettingthecostincurredbytheotherhalf.Itisaprotectiveoptionsstrategythatisimplementedafteralongposition[2]inastockthathasexperiencedsubstantialgains.Theinvestorbuysaprotectiveput[3]andsellsacovere...
What is a Zero Cost Collar?A zero cost collar is a form of options collar[1] strategy to protect a traders losses by purchasing call and put options that cancel each other out. The downside of this strategy is that profits are capped, if the underlying assets price increases. A zero cost collar strategy involves the outlay of money on one half of the strategy offsetting the cost incurred by the other half. It is a protective options strategy that is implemented after a long position[2] in a stock that has experienced substantial gains. The investor buys a protective put[3] and sells a covered call[4]. Other names for this strategy include zero cost options, equity risk reversals, and hedge wrappers.
Image by Sabrina Jiang © Investopedia 2020 Basics of Zero Cost CollarTo imple...