CandleFocus

Zero-Cost Strategy

A zero-cost strategy can be a great way to take advantage of market opportunities without any additional outlay of cash. For example, a trader might use a zero-cost option strategy to speculate on the direction of a stock price by taking a risk-free long position in a call option and a risk-free short position in a put option—this is known as a collar. The trader can make a profit if the price of the underlying stock moves in the direction they speculated on.

Zero-cost strategies enable traders and investors to access the market without committing too much capital upfront, allowing traders to diversify their portfolio and spread risk with less money at stake. Traders also use these zero-cost strategies to generate income within a portfolio. For example, traders may buy an in-the-money call option with a delta of 0.60 and sell an in-the-money put option with a delta of 0.40 to generate a risk-free income stream—known as a zero-cost collar.

Zero-cost investment strategies are also popular with investors looking to hedge against market volatility. This strategy works by buying a stock that is expected to go up and simultaneously shorting a stock that is expected to fall. Thus, even if the broader market drops, the investor’s gains should generally somewhat cancel out the losses.

Zero-cost options can also be used to set up a zero-cost collar. This consists of buying a call option and a put option of an equal net delta value, while simultaneously selling one of those options away. This establishes a price range within which a stock can be traded. If the stock’s price moves outside of this range, the trader makes a profit.

Zero-cost strategies are most effective when investors are able to accurately predict market sentiment and prices in advance. This is not always easy and as such, it is important to weigh up any potential losses of using such a strategy if the market moves against the trader. Additionally, potential returns will never be as high as with strategies that do incur expenses.

Overall, zero-cost strategies can be an effective tool for traders looking to access the market without spending too much upfront, or to take advantage of investment opportunities without risking too much of their portfolio. It is important to consider the risks associated with any strategy, however, and to ensure that the returns will outweigh the costs.

Glossary Index