Zero Cost Strategy

AAA

DEFINITION of 'Zero Cost Strategy'

A trading or business decision that does not entail any expense upon execution. Zero-cost trading strategies can be used with a variety of investment types, including equities, commodities and options. A zero-cost business strategy might be to improve sales prospects for a home by decluttering all the rooms, packing excess belongings into boxes and moving the boxes to the garage. Zero cost strategies often involve the simultaneous purchase and sale of an asset such as that both costs cancel each other out.

INVESTOPEDIA EXPLAINS 'Zero Cost Strategy'

One example of a zero-cost trading strategy is the zero-cost cylinder. In this options trading strategy, the investor works with two out-of-the money options, either buying a call and selling a put or buying a put and selling a call. The strike price is chosen so that the premiums from the purchase and sale effectively cancel each other out. Zero-cost strategies help reduce risk by eliminating upfront costs.

RELATED TERMS
  1. Call

    1. The period of time between the opening and closing of some ...
  2. Option

    A financial derivative that represents a contract sold by one ...
  3. Zero Cost Collar

    A type of positive-carry collar that secures a return through ...
  4. Strike Price

    The price at which a specific derivative contract can be exercised. ...
  5. Put

    An option contract giving the owner the right, but not the obligation, ...
  6. Cylinder

    A term used to describe a transaction, involving two derivatives, ...
RELATED FAQS
  1. What is the difference between a zero-coupon bond and a regular bond?

    The difference between a zero-coupon bond and a regular bond is that a zero-coupon bond does not pay coupons, or interest ... Read Full Answer >>
  2. How do I evaluate a debt security?

    Debt securities are a form of loan from an investor to the government or a business. Among the many different types of debt ... Read Full Answer >>
  3. What risks should I consider taking a short put position?

    The risks to consider before taking a short put position are the odds of sustained weakness in the asset price and a spike ... Read Full Answer >>
  4. What happens if a software glitch fails to execute the strike price I set?

    If you've ever suffered the frustrating experience of having an order not filled or had a strike price fail to execute because ... Read Full Answer >>
  5. How can I use expected return with my risk profile to make an investment decision?

    Investors use expected return to evaluate the potential gain or loss resulting from investing capital in a particular security ... Read Full Answer >>
  6. How do traders use out-of-the-money options to hedge?

    Traders can utilize out-of-the-money options to hedge an existing market position by either buying or selling options. A ... Read Full Answer >>
Related Articles
  1. Mutual Funds & ETFs

    Cutting Edge Options Trades: The Zero-Premium Hedge

    This options trade is essentially free and can have huge profit potential, but it's not without its risks.
  2. Options & Futures

    Trading Options With The Zero-Cost Cylinder

    The zero-cost cylinder allows traders to effectively trade the market while protecting their downside.
  3. Investing

    Prospering In The Next Bear Market: Here's How

    Prepare to survive, and even prosper, in the impending bear market, by considering and putting into action the following four strategies.
  4. Stock Analysis

    3 Stocks To Buy and Hold For the Rest of 2015

    One of the dominant themes to consider for 2015 is the normalization of monetary policy as the Fed raises interest rates.
  5. Investing Basics

    6 Books for Millennials Interested in Investing

    Reading books about finance and investing is a great way for millennials to effectively invest their time and pocket money into becoming better investors.
  6. Mutual Funds & ETFs

    Looking To Invest In Texas? Here Is How

    Ranging from energy to household names, here are some of the top investment opportunities in Texas.
  7. Professionals

    When Couples Have Different Risk Appetites

    Communication, compromise and frequent monitoring will lead to successful investing for spouses with different risk tolerances.
  8. Investing

    is It Wise To Copy Warren Buffett's Investment Strategy?

    Buffett has proven to be one of the most astute investors of all time. Can you emulate his success?
  9. Investing

    5 Great Investors Who Aren't Warren Buffett

    Here are five other investors, not named Warren Buffett, that are also considered to be the best of the best in the industry.
  10. Fundamental Analysis

    Three Benefits Of Purchasing High-Priced Stocks

    High-priced stocks can be great wealth building vehicles for individual investors.

You May Also Like

Hot Definitions
  1. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  2. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  3. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
  4. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  5. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
  6. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!