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.
The volatility skew dictates a collar's pricing by making the downside put more expensive than the upside call, forcing an asymmetric risk-reward profile.
A systematic application of options strategies transforms a portfolio from a passive collection of assets into a dynamic system engineered for resilience and superior risk-adjusted returns.
Proactive hedging uses linear instruments like forwards to lock in rates for forecasted exposures; reactive hedging uses non-linear options to manage risk for confirmed or contingent events.
We use cookies to personalize content and marketing, and to analyze our traffic. This helps us maintain the quality of our free resources. manage your preferences below.
Detailed Cookie Preferences
This helps support our free resources through personalized marketing efforts and promotions.
Analytics cookies help us understand how visitors interact with our website, improving user experience and website performance.
Personalization cookies enable us to customize the content and features of our site based on your interactions, offering a more tailored experience.
