Zero Cost Collar
Candlefocus EditorThe two options used as part of this type of hedging strategy are usually chosen to have different strike prices. The strike price of the call option is typically higher than the strike price of the put option so that the risk of price volatility is limited. The theory behind the zero cost collar strategy is that the difference in the option prices should be adequate enough to cover the cost of purchasing them. The end result is that the premium for both the call and put options typically cancel each other out, resulting in a zero cost hedging strategy.
By implementing this strategy, an investor or trader can protect their profits from steep price declines and limit potential losses from large price increases over a certain period. While this type of hedging strategy may sound relatively simple in concept, it is important to remember that the call and put options chosen must have the same underlying asset and maturity date in order for the strategy to be successful. That said, it is important for traders and investors to carefully monitor the changing prices of the options selected and to make sure that the prices remain accurately balanced. Otherwise, the zero cost collar strategy may result in an unexpected cost being incurred.
In conclusion, a zero cost collar strategy is one of the most widely used derivative hedging strategies in the markets, and is used by investors as a means of protecting their profits from price fluctuations in an underlying asset. It is important to remember, however, that strike prices of the two options used must be carefully chosen and monitored in order to ensure that the prices remain balanced and there is no additional cost incurred.