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.