Definition of Zero-Collar
What is a Zero-Collar
A zero-collar is a type of investment strategy that uses derivative contracts to limit the potential investment gain or loss to within a specific range. It involves the purchase of a call option with the simultaneous sale of a put option, both with the same expiration date and strike price. The collar is considered to be "zero-cost" because the premium received from the sale of the put option offsets the premium paid for the call option, which is why it is also known as a zero-cost collar.
Benefits of a Zero-Collar Strategy
The zero-collar strategy is often used by investors who hold a long position in an underlying asset, and they want to limit their downside risk without sacrificing too much upside potential. By purchasing the call option, the investor has the right to buy the underlying asset at the strike price if the price of the asset rises above the strike price. This will limit the potential loss to an investor if the asset price declines.
At the same time, by selling the put option, the investor is obligated to buy the underlying asset at the strike price if the price of the asset falls below the strike price. This limits the potential gain to an investor if the asset price rises above the strike price.
When to Use a Zero-Collar Strategy
The zero-collar strategy is often used in volatile markets or with assets that have uncertain future price movements. It can also be used as a form of insurance to protect against potential losses. However, it is important to note that the zero-collar strategy comes with its own risks and limitations.
GlobEx Markets Financial Dictionary of Terms, Phrases and Concepts
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Related Investment Terms
Interest Rate Cap
Interest Rate Collar
Interest Rate Floor
