What is a 'Zero-Cost Strategy'

Zero-cost strategy refers to a trading or business decision that does not entail any expense to execute. A zero-cost strategy costs a business or individual nothing while at the same time improves operations, makes processes more efficient, or serves to reduce future expenses. As a practice, a zero-cost strategy may be applied in a number of contexts to improve the performance of an asset.

Breaking Down 'Zero-Cost Strategy'

Zero-cost trading strategies can be used with a variety of assets and investment types, including equities, commodities and options. Zero cost strategies also may involve the simultaneous purchase and sale of an asset such as that both costs cancel each other out.

In investing, a zero-cost portfolio may see an investor build a strategy based on going long stocks that are expected to go up in value and short stocks that are expected to fall in value (a long/short strategy). For example, an investor may choose to borrow $1 of Facebook stock and sell the $1 stake in Facebook and reinvest that money into Twitter. After a year, assuming the trade has gone as expected, the investor sells Twitter to buy back and return the stock of Facebook they borrowed. The return on this zero-cost strategy is the return on Twitter minus the return on Facebook (note: this scenario ignores margin requirements).

Zero-Cost Strategy Examples

A company that seeks to increase its efficiency while also reducing costs may decide to buy a new network server to replace several older ones. Because of advances in technology, the older servers are resold and the sum earned from the sale pays for the new server, which is more efficient, works faster, and will reduce costs going forward due to lower maintenance and energy costs.

A practical application of a zero-cost business strategy for an individual 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. Because the labor is free, no cost is incurred.

Zero-Cost Strategy and Options Trading

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.

Another example of a zero-cost strategy in options trading involves setting up several options trades simultaneously for which the premiums from the net credit trades offset the net debit trade premiums. With such a strategy profits are determined by the performance of the assets rather than transaction costs.

  1. Trading Strategy

    A set of objective rules designating the conditions that must ...
  2. Horizontal Spread

    A horizontal spread is a simultaneous long and short derivative ...
  3. Investment Strategy

    Investment strategy is what guides an investor's decisions based ...
  4. Covered Bear

    A trading strategy in which a short sale is made on a long position. ...
  5. Naked Call

    A naked call is an options strategy in which the investor writes ...
  6. Leg

    A leg is one component of a derivatives trading strategy, in ...
Related Articles
  1. Trading

    Trading Options With the Zero-Cost Cylinder

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

    4 Investment Strategies To Learn Before Trading

    The best thing about investing strategies is they’re flexible.
  3. Trading

    Create Your Own Trading Strategies

    Do-it-yourself trading can be very rewarding—both psychologically and for your wallet.
  4. Trading

    Collecting Option Premium In The Grain Market

    Believe it or not, there are some great income-generating strategies that are lower in risk.
  5. Trading

    Trade The Covered Call - Without The Stock

    The standard covered call can be used to hedge positions or generate income. This calendar spread may do so more effectively.
  6. Trading

    Fix Broken Trades With the Repair Strategy

    You can recover from your losses if you know how to use this handy trader's tool.
  7. Trading

    Beginners Guide To Options Strategies

    Find out four simple ways to profit from call and put options strategies.
  8. Investing

    A Strategy For Optimal Stock And Bond Allocation

    We tell you how this strategy avoids downturns, improves performance and invests in the best asset classes.
  9. Trading

    Options Strategies for Your Portfolio to Make Money Regularly

    Discover the option-writing strategies that can deliver consistent income, including the use of put options instead of limit orders, and maximizing premiums.
  10. Trading

    How To Profit From Volatility

    We explain four key strategies to profit fom volatility in markets.
  1. What is index option trading and how does it work?

    Learn about stock index options, including differences between single stock options and index options, and understand different ... Read Answer >>
  2. How can derivatives be used to earn income?

    Learn how option selling strategies can be used to collect premium amounts as income, and understand how selling covered ... Read Answer >>
Hot Definitions
  1. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  2. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  3. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  4. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  5. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  6. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
Trading Center