Zero Cost Collar
A zero cost collar sets the call and put strikes so the premiums cancel, giving free downside protection. Learn how it works and what 'free' really costs you.
A zero cost collar is a collar tuned so the premium you collect from the sold call exactly cancels the premium you pay for the put. The net cost is zero. You get downside protection without spending a dime out of pocket.
It sounds like a free lunch, and in cash terms it nearly is. But "free" here has a real price, just not one paid in cash. Let me show you the balance.
Making the Premiums Cancel
A regular collar usually has a small net cost, because the put you buy is a bit pricier than the call you sell. A zero cost collar removes even that by choosing strikes where the two premiums match.
You pick a put strike for your floor, then choose a call strike whose premium equals what the put costs. Collect the same amount you spend, and the position nets out to zero. You have arranged insurance for your shares that costs nothing up front, funded entirely by the upside you agreed to give away.
Watch It Work
You own 100 shares of Apple at $200 and want protection that costs nothing today. You build a zero cost collar:
- Buy a $190 put for $3 a share (the floor)
- Sell a $210 call for $3 a share (the ceiling)
- Net cost: $0, since the two premiums cancel
Your shares are protected between $190 and $210, and you paid nothing to set it up.
Apple crashes to $160. The put floors your sale at $190. Your loss is capped, and the protection cost you no cash to own.
Apple soars to $250. The sold call caps you at $210. Your shares are called away there, and you miss the run above $210. That surrendered upside is what actually paid for the "free" put.
Apple sits near $200. Both options expire worthless. You kept your shares, and the collar cost was truly zero.
What "Free" Really Costs
A zero cost collar is free in cash, not free in trade-offs. The price is the upside you gave up.
By selling the call to fund the put, you handed away all your gains above the call strike. If the stock rockets, you watch that rally pass by, capped at the ceiling. In a strong bull run, that forfeited upside can be worth far more than the cash you saved on the put.
There is also a tuning choice: to make the premiums cancel, you often accept a lower floor or a nearer ceiling than you would ideally want. So the honest way to see it is a trade, not a giveaway. You are financing protection with potential profit. That can be a smart deal when guarding gains matters more than chasing more, which is exactly when investors reach for it.
- A zero cost collar sets strikes so the premiums cancel to zero.
- You get a floor for no cash out of pocket.
- The real cost is the upside given up above the call strike.
- It suits investors focused on protecting gains, not chasing more.
Pop Quiz
Three quick questions to see what stuck. Pick an answer and the explanation shows up right away.
How does a zero cost collar cost nothing in cash?
Strikes are chosen so the call premium collected equals the put premium paid, netting to zero.
What actually pays for the "free" protection?
You surrender gains above the ceiling, and that forfeited upside is the true cost of the collar.
When does a zero cost collar make the most sense?
Since it caps the upside, it fits an investor prioritizing protection of gains over further appreciation.
Bottom Line
A zero cost collar is protection that costs no cash, arranged by choosing a call whose premium exactly funds the put. Your shares get a floor for free, and the whole thing nets to zero on entry.
Just do not mistake cash-free for cost-free. You paid with your upside, surrendering every gain above the call strike. When guarding what you have matters more than reaching for more, that is a trade worth making.
Keep going: the standard version is the collar, built from a protective put and a covered call.