A Zero-Cost Collar is an options strategy designed to protect an existing long position in an underlying asset from downside risk, funded by selling an out-of-the-money call option. The goal is to structure the strategy so the premium received from selling the call equals the premium paid for the put. It provides risk mitigation without upfront cost.
Mechanism
This strategy involves simultaneously buying a put option with a strike price below the current asset price (providing downside protection) and selling a call option with a strike price above the current asset price (generating premium). The strike prices are selected such that the net cost of the combined options is zero or negligible. This operational balance of premiums defines its structure.
Methodology
Employed by institutional crypto investors to hedge large digital asset holdings against price declines without incurring upfront options premium costs. This strategic approach offers downside protection while capping potential upside gains. It provides a cost-effective risk management solution in volatile crypto markets, balancing risk and reward.
An institution strategically times a collar by executing when its volatility forecast indicates the most favorable cost-benefit for the options structure.
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