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Zero-Premium Collar

Hedging strategy used for high-value, concentrated stock positions, previously referred to as a "costless collar" (the name was changed for legal reasons).

You purchase put options and sell call options on your stock through a securities firm experienced with these transactions. This essentially sets the trading range (i.e. the "collar"). It is "costless" to an individual in that no net out-of-pocket costs result from the totaling of the prices of puts and calls.

This strategy allows you to hold the stock after an option exercise for long-term capital gains and minimizes the risks of stock-price fluctuations. The hedged position can be monetized with a loan (if you are not a senior executive, director, or other affiliate). But the strategy has uncertain legal and tax ramifications, it is prohibited by many companies, and you give up the benefit of future price increases beyond the collar price.

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