zero cost collar

Unlock Zero-Cost Collar to Hedge Your Stocks for Free

We all know it costs money to buy options. But do you know there is a special options strategy that costs nothing?

We show you what is Zero-Cost Collar, and how to buy a Put for free to hedge against stock price crashes.

What Is Zero-Cost Collar?

The Zero-Cost Collar is a hedging strategy that combines a Covered Call with a long Put to create a zero-cost bearish options strategy. It can act as insurance against stock price crashes to limit the downside risks of our stock position.

How to Execute a Zero-Cost Collar?

A Covered Call is made up of a short OTM Call to generate income for a stock position:

  • When the stock price increases, 100 shares will be sold at the Call strike price.
  • When the stock price falls, we collect the premium from selling the Call option.
atvi covered call
A popular strategy is to boost stock investment income with a Covered Call.

It's one of the most common options trading strategies.

Even though we collect the short Call premium when the stock price falls. If the bearish trend lasts for a long time, we can still lose a lot from our investment. So we can add a long Put to limit our downside losses.

atvi long put
Buy a Put option to hedge against falling stock prices.

The income from the short Call can offset the cost of the long Put, which means the Zero-Cost Collar becomes a free hedging strategy that adds a stop-loss for our shares.

atvi zero-cost collar
The value of short Call and long Put cancel each other out to create a Zero-Cost Collar.

It's free insurance against falling stock prices.

Why Use a Collar Option?

The Zero-Cost Collar has a few advantages:

  • The long Put contract can set a stop-loss for the stock position.
  • The premium from Covered Call and long Put cancel each other out to give us a free Put contract for hedging.
  • The stock position can earn dividends.
  • We can adjust the strike prices of Call and Put to suit different market expectations to reduce risks.

When we feel bearish about the ATVI stock price, we can trade a narrow Zero-Cost Collar to be more protective about the downside by setting a higher long Put price.

narrow vs wide collar
Adjust the width between Call and Put strikes to manage risks.

If we feel bullish, we can trade a wider Zero-Cost Collar with a higher short Call strike price to give the strategy more room to move upwards.

Risks of a Zero-Cost Collar

Here are some drawbacks of the Zero-Cost Collar:

  • The short Call price limits the maximum profit for the strategy, as 100 shares will be sold when the stock price goes up beyond the strike price.
  • The trade combines 100 shares with two option contracts, making it quite a complex strategy.
  • It requires a lot of capital to purchase 100 shares.
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Stock That Works Well With Zero-Cost Collar

The Bullish Value Stock picker uses Upside to sort a list of undervalued stocks that are ready to go up.

StocksDescriptionLastFair valueUpsideDividend yield Inc$34.79$88.37154.01%1.74%
VLKAFVolkswagen AG$164.01$359.09118.94%18.76%
BIGBig Lots Inc$8.59$18.15111.29%15.83%
LGFRYLongfor Group Holdings Ltd$24.92$52.37110.15%6.21%
TCEHYTencent Holdings Ltd$42.75$88.97108.12%0.70%
ZLNDYZalando SE$14.23$29.51107.38%
VFCVF Corp$18.79$38.29103.78%6.27%
OCDDYOcado Group PLC$13.35$25.4490.56%
PARAParamount Global$15.74$29.6288.18%1.23%
CTTAYContinental AG$7.39$13.7085.39%2.08%

JD is extremely undervalued right now with 154% of Upside. It is a great candidate for a Zero-Cost Collar to profit from a bullish outlook.

The JD Zero-Cost Collar is made up of 100 shares, a short Call that expires next month to offset the cost of a long Put.

jd zero cost collar
Cancel out the costs of Call and Put options to create a Zero-Cost Collar.

So we get free downside protection to reduce the losses if the market crashes.

Now you know how to use Zero-Cost Collars to protect the stock value, we can use the value stock picker to find underlying to invest in long-term.

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