Costless Collar (Zero-Cost Collar)

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The Costless Collar, or Zero-Cost Collar, is established by buying a Protective Put while writing an out-of-the-money Covered Call with a strike price at which the premium received is equal to the premium of the Protective Put purchased.

A Zero-Cost Collar means the option premiums approximately offset at entry, before fees. It does not eliminate the stock investment, opportunity cost or every loss. Protection depends on the put strike relative to the stock cost, matching deliverables and maintaining both legs. Available strikes and premiums depend on market conditions.

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Limited Profit Potential

The short call caps the position’s expiration upside. Maximum profit is reached at or above the call strike, provided the stock and option quantities and deliverables match.

Example

Assume XYZ shares cost $50. A trader holds 100 shares, buys one $50-strike put for $5 per share and sells one $60-strike call for $5 per share, both expiring in 12 months. The $500 put cost and $500 call premium offset, leaving a $5,000 stock investment before fees.

At expiration with the stock at $70, assignment on the $60 call caps the share sale price at $60. The stock gain is $1,000, and the option entry premiums offset, so the combined profit is $1,000 before costs.

At expiration with the stock at $40, the put provides the right to sell the shares for $50. Its $1,000 intrinsic value offsets the $1,000 stock loss, producing a zero combined gain or loss before costs.

At expiration with the stock at $50, both options have zero intrinsic value and the shares are unchanged. The combined result is zero before costs. Compared with a covered call alone, the put used the $500 premium to buy protection; that is a trade-off, not an additional cash loss.

These examples use standard U.S. stock options with a 100-share contract size and matching expiration dates. Related structures can use ETF, index or futures options, but contract multipliers, exercise style, settlement and the underlying price range can differ. A stock’s zero price floor must not be assumed for every futures contract.

Commissions

For ease of understanding, these examples exclude commissions, fees and financing costs. Include all costs when comparing an actual position; there is no universal commission amount.

For active traders, transaction costs can consume a significant part of returns. Compare the full commission and fee schedule, exercise and assignment charges, and bid-ask spreads. The cost of entering and closing every leg matters.

Summary

A zero-cost collar can fit a stockholder who wants a price floor through expiration and is willing to sell at the call strike. It is less useful when retaining all upside matters more than protection. The put strike determines how much stock downside remains; offsetting premiums alone do not make the whole position risk-free.

Similar Strategies

The following strategies offer related market exposure. Compare their construction, cost, maximum loss and assignment obligations; a similar outlook does not mean identical risk.

The Collar Strategy

Bull Put Spread

Bull Call Spread

Before expiration and assignment

The diagrams and worked outcomes describe expiration payoffs, not an option’s market price before expiration. Time decay, implied volatility, rates, dividends and bid-ask spreads affect early closing values. American-style short options can be assigned early; a protective long option is not automatically exercised when a short leg is assigned. Closing or exercising one leg can change the remaining position’s risk.