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Using a Zero-Dollar Collar to Protect Low Cost Basis Stocks

Using covered calls and puts in a conservative manner can benefit us in so many ways. In this article I will present a method to protect stocks in our portfolio that have increased in value substantially since they were purchased. We will utilize both covered call writing and protective puts which is known as the collar strategy.


Components of a collar

  • Own 100 shares of the underlying security (stock or exchange-traded fund) per contract
  • Sell (usually) an out-of-the-money call option
  • Buy (usually) an out-of-the-money put option
  • The net premium can be a debit, credit or break even


Why use a collar?

The advantages of a collar are the downside protection afforded by the put ownership (giving us the right to sell at the strike price no matter how low the price drops) and the share appreciation potential from current market value up to the call strike price (but not beyond the strike price). The disadvantage, of course, is the cost of the protective put.


What is a zero-dollar collar?

This is a collar where the premium generated from the call option is equal to or nearly the same as the cost of the put premium resulting in a low-cost or no cost scenario on the option side. If this can be accomplished, we can then benefit from the advantages stated above at little or no cost. This strategy can be particularly useful for those trading with securities that were purchased at significantly lower prices than current market value. As an example, I have selected Helen of Troy Ltd. (HELE) a stock on our Premium Watch List at the time I am writing this article. Here is a one-year chart showing the price nearly doubling in that time frame (yellow field highlights share appreciation):

collar strategy

Helen of Troy- 1 year chart

We can opt to protect the huge appreciation by buying a put but that will result in a net debit in our account. We can also elect to sell half the shares and play with “house money” but here we are reducing our position on one of our best-performers. Another approach is the zero-dollar collar. Let’s have a look at the options chain on 10/13/2015 and view the five-week November expirations to see if we can locate a combination that will accomplish three goals:

  • Provide downside protection against a substantial loss in share value
  • Provide an opportunity of limited share appreciation from current market value up to the call strike price
  • Result in a low or no-cost option collar or a zero-dollar collar


Here is the options chain:

Note the following with HELE trading at $103.19:

  • The out-of-the-money $105.00 call generates a bid premium of $2.55 (brown row)
  • The out-of-the-money $100.00 put shows an ask price of $2.55 resulting in a zero-dollar collar


Have our three goals been met?

Provide downside protection against a substantial loss in share value

Yes. We are protected against any share depreciation below the $100.00 put strike. We are susceptible to share decline from $103.19 down to the $100.00 strike but no more than that.

Provide an opportunity of limited share appreciation from current market value up to the call strike price

Yes. We retain the potential for share appreciation from $103.19 up to the $105.00 call strike. This would represent a 1.75% 5-week return or an 18.2% annualized return.

Result in a low or no-cost option collar or a zero-dollar collar

Yes. We have an option credit on the call side of $2.55 and a put debit of $2.55 resulting in a zero-dollar collar.


Is it possible to do even better?

Yes, it is possible by leveraging the Show or Fill Rule, we may be able to end up with an options credit and still all the advantages of a collar. See pages 225 – 227 of the classic version of the Complete Encyclopedia for Covered Call Writing for details on how to accomplish this.


Disadvantages of the zero-dollar collar

As with all forms of covered call writing, the profit potential is limited by the call strike. The cost of the put premium also reduces profit potential as there is always cost to an insurance policy of this nature. Finally, we are protected against catastrophic share loss but still susceptible to some decline is share value.



For those who have a portfolio consisting of low-cost basis securities the zero-dollar collar can be a useful tool. It is a no-cost way of generating protection against significant loss in share value while at the same time still offering an opportunity for share appreciation.


New Greek Spreadsheet on Premium Site

Based on member inquiries, I created a spreadsheet showing the impact of changes in share price, volatility and time to expiration on our long and short call and put values. Look in the “resources/downloads” section of the Premium Site (right side) and scroll down to “G” You may want to print this out and leave near your computer for quick reference.


Blue Collar Scholar Competition: 

Contest leaders as of Friday’s market close (S&P 500 reading at the end of the year)

John G

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Sample Commentary from Ricky S:

“People are more likely to be positive and motivated through Christmas and the New Year holiday period. Thus spending more money and enjoying the holidays”.

The six winners will be published in the January 10, 2016 newsletter.


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1- Saturday January 23rd, 2016: Kansas City, Missouri

9 AM – 12:30 PM

Matt Ross Community Center


2- New York Stock Traders Expo

February 21st – 23rd

Marriott Marquis Hotel, NYC


Events calendar


Market tone

Markets were extremely volatile this week, as investors reacted to the first US interest rate hike in nine years. Other economic data came in mixed, and included modest signs of recovery in China and the eurozone. The Chicago Board Options Exchange Volatility Index (VIX) remainewd around 20 for most of the week, down from its previous-week high but above the mid-teens, where it had been for much of the year.The price of crude oil continued to decline to multiyear lows due to a global supply glut. This week’s reports:

  • As expected, the Fed announced the first interest rate hike in nine years, reporting confidence in the economy, while giving assurances that further rate hikes would be gradual
  • The federal funds rate moved up a quarter of a percentage point to 0.25%–0.50%. The vote to raise rates was unanimous.
  • The US Consumer Price Index was flat in November while core CPI –– excluding food and energy –– rose 0.2%. For the year, CPI rose 0.5% while core prices were up 2.0%
  • The US House of Representatives passed a spending bill Friday morning that will fund the government through September and lift a 40-year ban on oil exports. The Senate is expected to pass the bill as well. In exchange for lifting the long-time ban on exporting crude oil, Democrats secured an agreement extending wind and solar tax credits and reauthorizing a conservation fund
  • US housing starts rose 10.5% in November to a seasonally adjusted annual pace of 1.17 million units
  • Building permits rose by an impressive 11% to a five-month high. It was the eighth straight month of more than 1 million units in annualized housing starts, the longest stretch since 2007
  • Builder confidence dipped in December. However, the one-point drop to 61 in the National Association of Home Builders/Wells Fargo Housing Market Index still indicated a positive outlook, up from 58 a year ago and well above the neutral mark of 50
  • Initial jobless claims declined by 11,000 to 271,000 for the week ending December 12th. Weekly jobless claims have remained below 300,000 for 41 consecutive weeks, the longest such run since the early 1970s
  • Continuing claims fell by 7,000 to 2.24 million for the week ending December 5th

For the week, the S&P 500 dropped by 3.79% for a year to date return of (-) 2.26%%.


IBD: Uptrend under pressure

GMI: 1/6- Sell signal since market close of December 10, 2015

BCI: Cautiously bullish but remaining in a defensive posture selling at least 50% in-the-money strikes and deeper out-of-the-money puts until there is clarity regarding the market reaction to the Fed rate hike.

Wishing you the best in investing,

Alan ([email protected])


About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

17 Responses to “Using a Zero-Dollar Collar to Protect Low Cost Basis Stocks”

  1. Mike December 19, 2015 12:20 pm #


    When would you recommend using this zero dollar collar? I would think in volatile markets like now?


    • Alan Ellman December 20, 2015 9:50 am #


      This is an extremely defensive strategy. It would appeal to investors with low risk-tolerance and to those who had a bearish or volatile overall market assessment. In addition, as stated in the article, it would protect positions that have greatly appreciat6ed in value.


  2. Barry B December 20, 2015 1:11 am #

    Premium Members,

    This week’s Weekly Stock Screen And Watch List has been uploaded to The Blue Collar Investor Premium Member site and is available for download in the “Reports” section. Look for the report dated 12/18/15.

    Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them at The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:


    Barry and The BCI Team

  3. Fran December 20, 2015 10:04 am #

    In your Encyclopedia book you define delta as the option price change for every $1 change in stock price but I listened to a podcast where it was defined as percent likelihood to end up in the money…confused.


    • Alan Ellman December 20, 2015 2:59 pm #


      Both definitions are technically correct although the one found in my books/DVDs is most commonly used and accepted. Option values increase the closer to or the deeper in-the-money the strikes moves. Deep ITM calls have Deltas approaching 1 and will move near dollar-for-dollar with share price changes. By the same token, strikes deep ITM are more likely to expireITM, more so than ATM or OTM strikes which have lower Deltas and are less likely to expire ITM.

      There’s actually a third way to define Delta. This relates to the “hedge ratio” where stocks are traded against option positions generally to achieve Delta-neutral portfolio positions.

      My suggestion is to stick with the one found in my books/DVDs which is the amount option value changes for every $1 change in the price of the underlying security.


      • Fran December 22, 2015 7:41 am #


        Hate to take up your time on this but one more question if I may. On the stocks I want to keep, I should be looking at low-delta options right since they are less likely to get exercised?

        Thanks so much.


        • Alan Ellman December 22, 2015 2:18 pm #


          Happy to help. Yes, low-delta options are deeper out-of-the-money and less likely to end up in-the-money by expiration. Delta also tends to be higher the further out the expiration date and the greater the implied volatility of the underlying security.

          For detailed information on writing calls while also strategizing to retain shares (Portfolio Overwriting):

          343 – 346 (Complete Encyclopedia-Classic)

          341 – 351 (Complete Encyclopedia-Volume 2)


  4. Mike December 21, 2015 1:11 am #

    Hi Alan. I’m new to your website. Good work my friend.

    I’ve read several books on options and finished your put selling book recently. I understand the concepts so thanks for the knowledge.

    I sold 31 Dec $28 puts on SKX and $27.50 JAN puts on ETP. So far so good but next week will be interesting I believe as traders and hedge funds look to raise liquidity before the Christmas holidays.

    One question if I may. As a conservative investor, what do you think about my personal stop-loss rule to close any open position where the sold put option premium doubles in price? Based on some analysis, looks like this rule will keep any loss to less than 3% of the capital at risk.

    FYI, I also strive to keep any loss to no more than 1% of my total portfolio value on any given day,.. Including any unrealized gains or losses.

    Merry Christmas


    • Alan Ellman December 21, 2015 8:42 am #

      Hi Mike,

      Before I made any definitive comments regarding this strategy I would want to back test such factors as impact of implied volatility of the underlying security, bid-ask spreads and time to expiration on these parameters.

      As an example, with SKX currently trading at $30.00, if we sold the $28.00 1-month put for $0.70, the premium would more than double if share price dropped by $0.50 today (see chart below), accounting for Delta and bid-ask spreads. Closing today may be premature because we are still far from concerns for exercise.

      So the short answer is that without studying the strategy I can’t make any definitive statements but I do have concerns.



  5. Jay December 21, 2015 8:55 am #


    I read this today and found it of interest:

    The S&P has now had two 1.5% back-to-back losses in the second half of December. According to SentimenTrader, this hasn’t happened since 1937.

    Since 1928, there haveonly been eight back-to-back losses of more than 1% during the second half of December. All of those were during bear markets, but the S&P ended the year above the second down day level every single time.

    So maybe Santa has not forgotten us yet…..- Jay

    • Martin December 22, 2015 6:57 am #

      Thanks Jay. Yesterday was a good start.

      Good luck.


  6. Mike December 23, 2015 2:23 am #


    A common theme I’m reading on selling puts and calls is one must have an informed opinion/view on the overall market volatility and sentiment…i.e., whether I think we’re in a bullish, neutral, or bearish trend. Based on this assessment, I’m suppose to then pick a strike price of my call or put that reflects this assessment; i.e., ITM (bearish), ATM (neutral), and OTM (bullish).

    My assessment of the market direction, as I read, is to compare current volatility of the market to its historical averages. Perhaps some technical analysis that I am unware of. Heck, I simply listen to CNBC daily to get my market sentiment news but even that source is all over the map…some gurus predict a big crash while others predict a modest but volatile up-trending market in 2016. How us retail guys can possible predict this is a fools game for sure, but if I’m going to trade some calls and puts, I need a “process” step to make this assessment. Can you help me with this piece?

    I was hoping you could give me some guidance on how best to do assess the market volatility on any given day to draw an opinion on bearish, bullish, or neutral, so I can pick my strike prices accordingly. That is, this process step will be my first RULE that I will check off before I even look at stocks.

    1. Should I look at the VIX and compare its current value to, say, a 1 year average of VIX values, calling values at the average as (neutral), below the average as “bullish”, and above the average as “bearish” or what?

    2. Do I perform some kind of technical analysis on the S&P 500 index or Nasdaq index?

    3. Are there other statistics and indictors that I’m suppose to consume and synthesize (daily or weekly) into a conclusion of current market direction?

    Seems to me I must have a good baseline understanding and step-by-step process for drawing a reasonable market sentiment and direction assessment before I start on this journey of writing options. I realize nobody has a crystal ball on where the market is going, but I’d like to have a good foundation on how to go about doing this market analysis rather prescriptively without taking hours per day to do it.

    If there are any good authoritative sources out there that can help me draw this market conclusion (sort of like how you use the IBD 50 to get your stock “short list”) that would be a good to have.

    inally, how can I use an options IV to pick my strike prices. I believe I read in your book on covered calls to stick with an IV of 75% or less to start out. Is that correct. That ‘rule’ eliminates many stock options I’m looking at for sure. Also, how does a stock beta relate to the option IV, if any? What rule do you use between the beta and IV overall ? I recall in your book you recommended staying away from high beta stocks because they’re too volatile. So does that mean I should pick stocks who’s beta’s are 1 or less. My currently open ETP put position, as example, has a beta of .9. Another stock I’m eyeing is ATVI…nice uptrend as I can tell…but beta is 1.1.. But the 15 Jan 16, $40 call strike is going for about .65 cents with a nice low IV of 26%. This looks like a decent Buy-Write candidate notwithstanding the higher beta of 1.1. Once I have a good understanding of the IV/beta relationship I can focus my search a little more efficiently I hope.

    Appreciate any help you might suggest on this important piece of the option puzzle, Alan. I’m still learning.



    • Alan Ellman December 23, 2015 6:22 am #


      You are 100% correct that overall market assessment plays a key role in our option-selling decisions and MUST be factored in. I have stressed this point in all my books/DVDs. My responses:

      1- The talking heads are all over the map confirming that we can’t predict with perfection but we sure can throw the odds in our favor.

      2- I use a combination of looking at the VIX (under 20 my preference), a chart of the S&P 500 (uptrending with 50-d SMA above the 200-d SMA my preference) and an overview of the weekly economic reports.

      3- I share my market assessment weekly in my blog articles as well as our Premium Stock Reports. I also share the market view of IBD and Dr. Eric Wish’s GMI Index. These are outstanding resources.

      4- Chart technicals also are factored in. If mixed, favor ITM calls and deeper OTM puts.

      5- IV is also important as you stated. 75% is way too high. I use a guideline of generating a 2-4% monthly initial returns when selling options. That will usually keep us away from high-IV stocks. I may go higher in bull markets and lower in extreme bear or volatile markets.

      6- I would lean on IV more than beta. Beta is a secondary factor because it is historical in nature while IV is forward-looking. If pressed on a guideline: low beta below .90 and high beta above 1.20. All other factors being equal, favor low-beta in bear or volatile market conditions; high beta in bullish environments. Keep in mind that not all betas are the same. It depends on the vendor providing the stats and varies by time frame and benchmark used. In the BCI Premium Reports, we use a 1-year time frame and the S&P 500 as a benchmark.


    • Jay December 23, 2015 8:15 pm #


      Between your excellent post and Alan’s excellent reply you guys have given us a Christmas present free workshop on the blog! Many thanks….

      As I grow longer of tooth and thinner of hair in my options trading I seek simplicity ever more.

      Like sign posts on familiar roads I know where VIX, moving averages, volume, seasonality and daily news are at any point.

      But with Star Wars the current buzz I must “Feel the Force”. If I suppress it because I can not chart it I will never be Luke Skywalker!

      For me investing will always be more art than science, more feel than mechanics. But, as anything else in life, the harder I work at it the luckier I get.

      Thanks again for a thought provoking post. – Jay

      • Alan Ellman December 28, 2015 7:28 am #

        Congratulations Jay…our first Star Wars reference…leave it to Jay!

  7. Alan Ellman December 23, 2015 7:02 am #


    Nike is scheduled for a 2-for-1 stock split today. Those who own these shares will now own twice as many shares at half the price. Also, look for a nice pop in share price after last night’s favorable earnings report.


  8. Alan Ellman December 23, 2015 4:56 pm #

    Premium members:

    This week’s 8-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site. The report also lists Top-performing ETFs with Weekly options.

    Next week’s ETF Report will be published on Tuesday evening.
    For your convenience, here is the link to login to the premium site:

    NOT A PREMIUM MEMBER? Check out this link:

    Alan and the BCI team

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