Zero Cost Collar is a popular options trading strategy designed to protect an investor’s portfolio from downside risk while limiting potential upside gains — all at little to no cost. This strategy is often used by investors holding large positions in a stock who want to safeguard their profits without selling their holdings.

In a Zero Cost Collar, an investor simultaneously buys a put option and sells a call option on the same underlying asset, typically with the same expiry date. The cost of purchasing the put is offset by the premium received from selling the call, thereby creating a “zero-cost” setup or one with minimal net expense.

The put option provides downside protection by allowing the investor to sell the stock at a predetermined strike price if the market declines. Meanwhile, the call option limits the upside potential, as the investor is obligated to sell the stock at a specific strike price if the market rises above that level. This balance of protection and limitation helps investors manage volatility and preserve capital.

For example, if you hold shares of a company trading at _100, you could buy a put option with a strike price of _95 and sell a call option with a strike price of _110. This structure ensures that your losses are limited below _95, while your profits are capped beyond _110. The premiums are typically adjusted to make the trade cost-neutral.

Key takeaway: The Zero Cost Collar is best suited for conservative investors who wish to hedge risk and lock in gains without spending additional capital. However, it’s essential to understand that this strategy restricts upside participation and should be executed only after assessing one’s risk tolerance and market outlook, in line with SEBI’s investment and derivative trading guidelines.