The Zero | zero collar option
Asbullmarketsageandcontinuetowardnewrecordhighs,itishumannaturetolookforastrategytoprotectyourinvestmentportfoliofromlosses.Azero-costcollarisanoption-basedstrategyforinvestorswhoarelookingforwaystopossibly“insure”theirstockportfolioagainstlosses.Thegistofthisoptionstrategyisthatyoupurchaseaputoptiontolimityourlossesifthemarketdeclineswhilesimultaneouslysellingacalloptionwithapremiumearnedequaltotheamountpaidfortheput—makingthetransactioncostless.Thedrawbackisthatthecalloptionsoldlimitsthepo...
As bull markets age and continue toward new record highs, it is human nature to look for a strategy to protect your investment portfolio from losses. A zero-cost collar is an option-based strategy for investors who are looking for ways to possibly “insure” their stock portfolio against losses. The gist of this option strategy is that you purchase a put option to limit your losses if the market declines while simultaneously selling a call option with a premium earned equal to the amount paid for the put—making the transaction costless. The drawback is that the call option sold limits the potential gain on the investment you are trying to protect. Understanding this shortcoming is pivotal to comprehending the strategy.
What is an Option?
An option is a contract that gives the option holder the right, but not the obligation, to buy or sell the underlying asset at a pre-specified price for the duration of the option contract. The option holder (buyer) pays a fee, the prem...