Zero-Cost Options refer to a structured options strategy, often called a collar or risk reversal, where the premium paid for purchasing an option is entirely offset by the premium received from selling another option or options. This strategy is primarily employed in crypto investing and institutional options trading to hedge risk or express a market view without an upfront cash outlay, thus minimizing direct hedging costs.
Mechanism
This mechanism typically involves simultaneously buying an out-of-the-money put option to protect against downside risk and selling an out-of-the-money call option to finance the put. Alternatively, it could involve selling a call and buying a put at different strikes and maturities such that the total premiums net to zero. The specific strikes and maturities are chosen to achieve the desired risk-reward profile and premium balance, effectively creating a synthetic position with no initial cost.
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