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Zero-Cost Collar
Definition
This is an options transaction where the underlying position (normally a stock) is protected by buying a put and selling a call. The premium earned by selling the call should offset the cost of buying the put. This strategy may also be used to protect a floating rate borrower against large interest rate increases. The premium earned on the long cap offsets the cost of the premium on the short floor.
Using the term Zero-Cost Collar :
A zero-cost collar can be very helpful in locking in a general range of values around a particular security. If you needed to use the capital from a position in the near term but did not want to sell yet due to tax or other reasons, then a zero-cost collar may help you realize your goals.
Pay Special Attention To :
Ensure the professional utilzing this strategy understands it well and has experience establishing a zero-cost collar.
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Related terms
derivatives , options strategies
