A collar where the call sold pays exactly for the put bought, giving downside protection with no cash outlay in exchange for capped upside.
The structure is a collar tuned so the net premium is zero. Because equity puts are usually more expensive than equidistant calls thanks to volatility-skew, the call strike ends up closer to the money than the put — the protection is not symmetric, and that asymmetry is the real cost.
Zero-cost collars are the standard tool for concentrated stock positions: a founder or executive locks a floor without writing a cheque. They also have tax and constructive-sale implications when the bands are tight, so the strike selection is a legal question as much as a market one.
Example: XYZ at $50. Buy the one-year $45 put at $2.40 and sell the one-year $56 call at $2.40 for zero net. You cannot lose below $45 and cannot gain above $56 — a $5 buffer down against $6 of upside given away.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Buying a call: payoff at expiry. A 105-strike call bought for 3 loses that whole 3 if the price finishes at or below 105, breaks even at 108, then gains a dollar for every dollar higher. The loss is capped at the premium; the upside is not capped.The volatility smile. Options on the same stock and the same expiry are not priced off one volatility. Strikes near the money carry the lowest implied volatility, and it rises towards both ends — usually faster on the downside, which tilts the smile into a skew.
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