zero-cost collar


Also found in: Acronyms.

Zero Cost Collar

An investment strategy in which one buys or sells one position while taking an opposite position for the same price that will limit both the return and the risk of one's investment. An investor sells a position that caps return while buying one that limits loss, while a borrower does the opposite. A zero-cost collar may be used for options, stocks, interest rates, or commodities. See also: Collar.

zero-cost collar

The investment position of being short a call option and long a put option for stock already owned. The premium received from selling the call option is used to pay for purchase of the put. The collar is designed to protect an investor against a decline in the price of the stock without the investor being required to sell the stock and pay a tax on capital gains.
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References in periodicals archive ?
Kim, "A zero-cost collar option applied to materials procurement contracts to reduce price fluctuation risks in construction," International Journal of Social, Behavioral, Educational, Economic, Business and Industrial Engineering, vol.
The most common derivative instruments used by insiders are: 1) prepaid variable forwards (forwards), 2) zero-cost collars (collars), 3) exchange funds, and 4) equity swaps.
Zero-Cost Collars (Collars) and Prepaid Variable Forward Contracts (Forwards)
Lemmon, 2001, "Managerial Ownership, Incentive Contracting, and the Use of Zero-Cost Collars and Equity Swaps by Corporate Insiders," Journal of Financial and Quantitative Analysis 36, 345-370.
For investors comfortable with relinquishing a stock's potential growth and dividends in exchange for downside protection at no cost, a zero-cost collar may be the best approach.
* By using a zero-cost collar, investors who do not need diversification can be protected against up-and-down market movement.
The Securities and Exchange Commission requires insiders to report their purchases of zero-cost collars and similar derivatives.