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Zero Cost Collar
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Zero cost collar or zero cost option is an option technique applied to secure a return. Also called “equity risk reversal” a zero cost collar is a type of positive carry collar. The zero cost collar is executed by buying a cap and a floor. Zero cost collar option strategies are employed for interest rates, commodities, options, and equities trading. An example of a zero cost collar option purchase is buying a put and selling a call at a lower strike price. The zero cost collar works because sale of the call will cap the return if the underlying falls in price and offsets the purchase of the put. Hedging with zero cost collar options meets FASB 133 derivatives hedging standards if the zero cost collar is written with a single underlying reference asset. Upside risk is still unlimited in a zero cost collar.
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