Zero-cost collar

A long put and a short call around a held asset, keeping its value between the two strikes; when the call's premium pays for the put, the protection costs nothing up front. Its price is the upside given away.

Where you will meet it

Zero-cost collar appears in 3 learning outcomes on the CFA syllabus. A few of them:

• Explain and propose approaches for professionals, corporate executives and similar clients that build their human and financial capital and their economic net worth
  CFA Level III · Private Wealth Pathway

  “Approaches include systematic pre-arranged selling plans, careful timing of option exercise, hedging with collars or similar structures where permitted, and diversifying the remaining portfolio away from the employer's sector.”

• Explain, for bull and bear spreads, straddles and collars, the objective, structure, payoffs, risks, value and profit at expiry, maximum gain and loss, and the underlying price at which each breaks even
  CFA Level III · Derivatives and Risk Management

  “Spreads and collars cap upside; straddles bleed time value.”

• Show how options can be used to reach a chosen level of equity risk exposure
  CFA Level III · Derivatives and Risk Management

  “Protective puts, covered calls and collars trim exposure without selling shares, perhaps avoiding tax or keeping votes.”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with Z · Glossary