Zero-Cost Collars - What a "Free" Hedge Really Costs
Reviewed by Leon Moyer - Published October 9, 2026 - Last reviewed October 9, 2026
In this lesson
Find the call strike that makes a collar roughly zero-cost, and list what the position still costs even when no premium is paid.
A zero-cost collar is a collar whose short call brings in about as much premium as the long put costs, so the hedge needs little or no cash up front. "Zero-cost" describes the premiums only. You still pay for the protection, just not in cash: you give up every dollar of gain above the call strike, and you still absorb the loss down to the put strike.
The Collar Strategy built a collar on 100 shares of XYZ at $52 with a 50 put and a 56 call, for a $0.33 net debit. This lesson asks the next question: which call would make it cost nothing, and what does that really cost you?
For the zero-cost collar in this lesson (100 XYZ at $52, the 50 put bought for $1.52 and the 55 call sold for $1.48, 45 days to expiration), at expiration and before fees:
- Maximum loss is $204: ($52 - $50 + $0.04 net debit) x 100, at or below $50.
- Maximum profit is $296: ($55 - $52 - $0.04) x 100, at or above $55.
- Break-even is $52.04: the stock price plus the $0.04 net debit.
How do you build a zero-cost collar?
Start with the put, because the put is the reason for the trade. Pick its strike from the loss you want to cap, as in Choosing a Protective Put's Strike and Expiration. Then look at calls with the same expiration and find the one whose premium matches the put's.
Which 45-day call pays for the 50 put?
Per contract, 45 days
These are model prices from the engine behind the free OptionsPro profit calculator, for XYZ at $52, 35% implied volatility and 45 days to expiration. The 50 put costs $152. Moving up the call strikes:
The 55 call is the closest match: $148 against $152, a net debit of just $0.04 per share. In practice, traders call any collar within a few cents of even "zero-cost". The 54 call goes further and pays a $0.31 credit, at the price of a $54 ceiling.
On a real chain, use the ask for the put you are buying and the bid for the call you are selling, since those are the prices you can expect to trade at. Because puts below the stock price usually trade at a higher implied volatility than calls above it, the call that pays for the put is often closer to the stock price than a flat-volatility model suggests.
What does a zero-cost collar really cost?
Protective put alone vs a 50/55 zero-cost collar, at expiration
Hover or tap the chart, or focus it and use the arrow keys, to read any price.
Open this trade in the free calculatorShow as table
Worked example
Protective put alone vs the 50/55 zero-cost collar
Both positions own 100 XYZ at $52 and the 50 put for $1.52. The collar also sells the 55 call for $1.48.
Up to $55, the collar is better by the $148 call premium. Above $55 it falls behind, and the gap grows by $100 for every dollar XYZ rises. At $62, the "free" hedge has cost $552 compared with simply buying the put.
Illustrative and hypothetical. The ticker and prices are invented for teaching, and the figures exclude commissions, fees, margin interest and taxes, which reduce real results. Past or hypothetical outcomes do not indicate future results.
So the honest list of costs for a zero-cost collar is:
- The deductible. The put still only starts working at $50, so the first $200 of a decline is yours.
- The cap. Every dollar above $55 belongs to the call buyer. For a stock you expect to rise over time, this is the biggest cost.
- Trading costs. Two options mean two bid-ask spreads and possibly two commissions, both on the way in and again if you close or roll.
- Assignment. Above $55, or just before an ex-dividend date if the call is in the money, your shares can be called away, possibly when you would rather keep them.
- Taxes. A collar can be a straddle for tax purposes, as The Collar Strategy - Long Stock, Long Put, Short Call explains. Talk to a tax professional.
When does a zero-cost collar make sense?
It fits a holder who wants to cap a loss over a set period and would genuinely accept selling at the call strike. Typical examples are a concentrated position you plan to reduce anyway, or a stock that has already run up and that you would be content to sell a little higher.
It fits poorly when you expect the stock to keep rising, when you do not want to sell the shares under any circumstances, or when the window is open-ended. Rolling zero-cost collars over and over can quietly cap a long-term winner many times in a row.
Check your understanding
A put costs $2.10 (ask). Calls on the same expiration bid $2.40, $2.05 and $1.70. Which call makes the collar closest to zero-cost, and what is the net?
Show answer
The call bidding $2.05: a net debit of $0.05 per share ($2.10 - $2.05), or $5 per collar.
In this lesson's 50/55 collar, how much less does it make than the put alone if XYZ finishes at $60?
Show answer
$352. The put alone makes $648 ($800 - $152); the collar is capped at $296.
Name two costs a zero-cost collar still has even when no premium is paid.
Show answer
Any two of: the deductible down to the put strike, the gains given up above the call strike, bid-ask spreads and commissions on two options, early or unwanted assignment, and possible tax effects.
Key takeaways
- A zero-cost collar sells the call whose premium matches the put's, so little or no cash is paid up front.
- Choose the put first, from the loss you want to cap; then find the call that pays for it.
- It still costs the deductible, every dollar above the call strike, two sets of trading costs and assignment risk.
- It suits a holder willing to sell at the ceiling over a set period, not a long-term winner you want to keep.
Common questions
What is a zero-cost collar?
A collar where the premium received for the short call roughly equals the premium paid for the long put, so the hedge costs little or nothing in cash up front. You still give up any gain above the call strike.
Is a zero-cost collar really free?
No. It costs no premium, but you still absorb the loss down to the put strike, you give up every dollar above the call strike, and you pay commissions and the bid-ask spread on two options. If the stock rallies, the cap can cost far more than a put would have.
How do you pick the strikes for a zero-cost collar?
Choose the put strike first, from the loss you want to cap. Then look up the call strikes with the same expiration and pick the one whose bid is closest to the put's ask. Because puts below the price usually trade at higher implied volatility, expect that call strike to sit closer to the stock price than a flat-volatility model suggests.
Can a collar be done for a credit?
Yes. If you sell a call closer to the stock price than the zero-cost strike, its premium can exceed the put's cost and you receive a net credit. The trade-off is a lower ceiling.