Zero Cost Collar

DEFINITION of 'Zero Cost Collar'

A type of positive-carry collar that secures a return through the purchase of a cap and sale of a floor. Also called "zero cost options" or "equity risk reversals."

BREAKING DOWN 'Zero Cost Collar'

This investment strategy is sometimes used in relation to interest rates, commodities, options, and equities. Investors looking to secure a return will sell a cap and buy a floor, whereas borrowers will sell a floor and buy a cap. For investors, the cost of the cap is offset by the income received from the floor.

An example of a zero cost option collar is the purchase of a put option and the sale of a call option with a lower strike price. The sale of the call will cap the return if the underlying falls in price, but it will also offset the purchase of the put. Obviously, upside risk is still unlimited.

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