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Zero cost collar

• The price of call equals the price of put in a collar. See collars.

• Is a transaction which has little or zero cash outlay or cost for the initiating person. Often, a security is held and some protection is sought via a hedging transaction. One example, would be the purchase of an out-of-the-money put (debit) and the sale of an out-of-the-money call (credit). Here, the premiums for the debit and credit are nearly the same. Therefore, there would be little or no cost for the person seeking the hedge. However, this position places a cap on the potential reward for holding the underlying asset. Essentially, the protection does not kick-in until the price of the underlying instrument goes below the exercise price for the put. Generally speaking, it should be noted that if the hedge occurred with both options at-the-money, then the person replicated a synthetic short against an actual long position. For the latter, the hedge would be considered as delta neutral whereas using two out-of-the-money options, the hedge at the origination would not be delta neutral. Rather, it would be computed as a partial hedge when placed.

 
 

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 Embedded terms in definition
 Asset
Call
Cap
Cash
Collar
Credit
Delta neutral
Delta
Exercise price
Exercise
Hedge
Hedging
Held
Long position
Long
Options
Origination
Partial hedge
Position
Purchase
Put
Sale
Security
Short
Underlying asset
Underlying
 
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