Try the Costless Collar (Zero-Cost Collar) Calculator — adjust the legs and explore profit, loss and breakevens.
The Costless Collar, or Zero-Cost Collar, is established by buying a Protective Put while writing an out-of-the-money Covered Call with a strike price at which the premium received is equal to the premium of the Protective Put purchased.
Hold 100 shares; Buy 1 put at the put strike price; Sell 1 call at the call strike price. Use the same expiration date.
A Zero-Cost Collar means the option premiums approximately offset at entry, before fees. It does not eliminate the stock investment, opportunity cost or every loss. Protection depends on the put strike relative to the stock cost, matching deliverables and maintaining both legs. Available strikes and premiums depend on market conditions.
A Zero-Cost Collar means the option premiums approximately offset at entry, before fees. It does not eliminate the stock investment, opportunity cost or every loss. Protection depends on the put strike relative to the stock cost, matching deliverables and maintaining both legs. Available strikes and premiums depend on market conditions.
Limited Profit Potential
Profit is limited by the sale of the LEAPS® call. Maximum profit is attained when the price of the underlying asset rallies above or equal to the strike price of the short call.
Call strike price minus net opening cost.
Example
Suppose the stock XYZ is currently trading at $50 in June '06. An options trader holding on to 100 shares of XYZ wishes to protect his shares should the stock price take a dive. At the same time, he wants to hang on to the shares as he feels that they will appreciate in the next 6 to 12 months. He setups a Costless Collar by writing a one year JUL '07 60 LEAPS call for $5 while simultaneously using the proceeds from the call sale to buy a one year JUL '07 50 LEAPS put for $5.
If the stock price rally to $70 at expiration date, his maximum profit is capped as he is obliged to sell his shares at the strike price of $60. At 100 shares, his profit is $1000.
On the other hand, should the stock price plunge to $40 instead, his loss is zero since the Protective Put allows him to still sell his shares at $50.
However, should the stock price remain unchanged at $50, while his net loss is still zero, he would have 'lost' one year's worth of premiums of $500 that would have been collected if not for the Protective Put purchase.
These examples use standard U.S. stock options with a 100-share contract size and matching expiration dates. Related structures can use ETF, index or futures options, but contract multipliers, exercise style, settlement and the underlying price range can differ. A stock’s zero price floor must not be assumed for every futures contract.
Commissions
For ease of understanding, these examples exclude commissions, fees and financing costs. Include all costs when comparing an actual position; there is no universal commission amount.
For active traders, transaction costs can consume a significant part of returns. Compare the full commission and fee schedule, exercise and assignment charges, and bid-ask spreads. The cost of entering and closing every leg matters.
Summary
A Zero-Cost Collar means the option premiums approximately offset at entry, before fees. It does not eliminate the stock investment, opportunity cost or every loss. Protection depends on the put strike relative to the stock cost, matching deliverables and maintaining both legs. Available strikes and premiums depend on market conditions.
Many senior executives at publicly traded companies who have large positions in their company's stock utilize Costless Collars as a way to protect their personal wealth. By using the Zero-Cost Collar strategy, an executive can insure the value of his/her stock for years without having to pay high premiums for the insurance of the put.
Similar Strategies
The following strategies offer related market exposure. Compare their construction, cost, maximum loss and assignment obligations; a similar outlook does not mean identical risk.
Before expiration and assignment
The diagrams and worked outcomes describe expiration payoffs, not an option’s market price before expiration. Time decay, implied volatility, rates, dividends and bid-ask spreads affect early closing values. American-style short options can be assigned early; a protective long option is not automatically exercised when a short leg is assigned. Closing or exercising one leg can change the remaining position’s risk.
Payoff summary
Maximum loss: Net opening cost minus put strike price.
Breakeven
The breakeven can change depending on which strikes the stock finishes between.
Calculate the breakeven prices
- Prices at or below the put strike price all break even only when the net opening cost equals put strike price.
- Net opening cost. Use this result only if it is between the put strike price and the call strike price.
- Prices at or above the call strike price all break even only when the net opening cost equals call strike price.
Ignore results below zero. A boundary price listed twice is a single breakeven.
Net opening cost means everything paid to open the position, less everything received. Include the shares as well as the options. If opening the position brings in money overall, treat that cost as a negative amount.
Amounts are per share before fees. Multiply by the shares covered by the position; standard equity options usually cover 100 shares per contract. If a maximum profit or loss calculation gives a negative amount, use zero. These figures assume matching contracts held to expiration and do not include financing or early assignment.
Compare This Strategy
Optional further reading to help you compare the tradeoffs.
- Protective Put vs Collar — Start with the loss level the investor wants to limit and how long the protection is needed.
- Collar vs Zero-Cost Collar — Decide how much premium to pay versus how much upside to sell.
Financial mechanics reviewed:
Sources: OIC strategy reference; OIC assignment guidance. Formulas use the stated payoff assumptions; examples are illustrative, not market quotes. Editorial standards and corrections.