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  • January 22, 2023
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Zero Premium Collar

A zero-premium option (zero-cost option) that is used to protect a position taken in a transaction by buying a put and selling a call in a way that the premium received from the call sale offsets the premium paid to purchase the put. In interest rate options, a costless collar can be used to provide protection against floating rate increases, where the premium paid to buy a cap offsets the premium received from selling a floor.

A collar is created by purchasing a put option with a strike price at or below the current underlying price and selling a call option with a strike price above the current underling price (while simultaneously holding the underlying). A zero-premium collar is structured in such a way that the premium received from the sale of the call option fully offsets the purchase price of the put option.

It is also known as a zero-cost collar or a costless collar.


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