Limited Profit Potential

Zero premium option

Maximum profit is attained when the price of the underlying asset rallies above or equal to the strike price of the short call.

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An options trader holding on to shares of XYZ wishes to protect his shares should the stock price take a dive. At the same time, he wants to hang on to the shares as he feels that they will appreciate in the next 6 to 12 months. Note: While we have covered the use of this strategy with reference to stock options, the costless collar is equally applicable using ETF options, index options as well as options on futures.

Writer, What is a zero-cost collar strategy? It does this by utilising call and put options which, in effect, cancel each other out. While it will put a cap on potential losses arising from the trade, it will also cap potential profits. It is designed to hedge against volatility in the underlying price of the asset.

However, for active traders, commissions can eat up a sizable portion of their profits in the long run. If you trade options actively, it is wise to look for a low commissions broker.

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Traders who trade large number of contracts zero premium option each trade should check out OptionsHouse. Summary By setting up the costless collar, a long term stockholder forgoes any profit should the stock price appreciates beyond the striking price of the call written.

This strategy is used in bear markets to protect investors from downside risk. After reading this article, investors will be able to implement this strategy into their own investing playbook to protect their portfolios from a falling market. By using this strategy, an investor places a limit on his potential maximum loss but also places a limit on his potential maximum gain. This occurs when the price of the underlying stock is greater than the strike price of the sold call option. This occurs when the price of the underlying stock is less than the strike price of the bought call option.

In return, however, maximum downside protection is assured. As such, it is a good options strategy to use especially for retirement accounts where capital preservation is paramount.

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Many senior executives at publicly traded companies who have large positions in their company's stock utilize costless collars as a way to protect their personal wealth. Similar Strategies The following strategies are similar to the costless collar in that they are also bullish strategies that have limited profit potential and limited risk.

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The Collar Strategy.