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Futures & Options: Zero Collar




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This article is from the Investing Articles: Stocks and Options series.

Futures & Options: Zero Collar

Another strategy, which is called the "zero-collar," involves buying a put with a strike price slightly below the current price of a held stock and selling a call with a strike price above the current price of the stock. The call should have the same expiration month as the put and have approximately the same premium value as the put.

The advantages of this strategy are:

1. The investor is protected on the downside if the stock falls considerably during the life of the "collar."

2. There is virtually no cost to the investor for this transaction, since the sale of the call should completely (or approximately) offset the cost of the put.

3. If the stock stays within the range of the "collar" until it expires, the transaction will be "transparent" to the investor.

4. If the stock is called away, the investor realizes a profit.

The disadvantage of this strategy is that in the rare event that the stock would go up significantly in price, the investor will lose out on the opportunity to make a "handsome" profit. Thus, if a stock is being evaluated as a zero-collar candidate, price volatility should be given significant consideration.

 

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