A Zero Cost Collar is a type of financial instrument that provides a hedge against changes in the price of an underlying asset, while simultaneously allowing an investor to participate in some of the potential price gains. The "zero cost" refers to the fact that the cost of the hedge is offset by the proceeds from the sale of a call option.A zero cost collar is created by simultaneously selling (or "writing") a call option at a higher strike price and buying a put option at a lower strike price. The proceeds from the sale of the call option are used to pay for the cost of the put option, effectively creating a zero cost hedge. The put option provides protection against a decline in the price of the underlying asset, while the call option caps the potential for price gains.Zero cost collars are often used by investors who want to protect their portfolios against market fluctuations, while still being able to participate in some of the potential price gains.For example, an investor who owns stocks may sell a call option to hedge against a decline in stock prices, while still being able to benefit from some of the potential price appreciation.It's important to note that zero cost collars are complex financial instruments that can involve significant risk and are not suitable for all investors. Additionally, the zero cost collar may not provide a perfect hedge against price changes, as the price of the underlying asset may decline below the strike price of the put option. As with any investment, it's important to thoroughly understand the risks and to consult with a financial advisor before entering into a zero cost collar or any other financial derivative.
