Definition
A zero-cost collar is a hedging structure built around a stock the investor already owns. It combines two options: buying a protective put below the current price to cap downside losses, and selling a covered call above the current price to cap upside gains. The strikes are chosen so the premium received from the call roughly equals the premium paid for the put — leaving little or no net cost.
The result is a defined range, or collar, around the stock price. The investor keeps the shares but trades away potential gains above the call strike in exchange for protection below the put strike.
Why it matters
How it works
Suppose an investor holds a stock at 100. They buy a put with a strike of 90 and sell a call with a strike of 115. The call premium offsets the put premium, so the hedge is close to free. From that point, losses below 90 are capped by the put, and gains above 115 are forfeited to the call buyer. Between the two strikes, the position behaves like the stock itself.
The structure is most attractive when an investor wants to hold a position — for tax, dividend, or conviction reasons — but cannot afford a large drawdown. The choice of strikes tunes the balance between how much protection is bought and how much upside is sacrificed.