A zero cost collar is a type of options trading strategy that involves buying and selling options to protect against price fluctuations while also limiting potential gains or losses. It is used by investors to protect the value of an asset while retaining the ability to benefit from potential upside.

To construct a zero cost collar, an investor would purchase a put option with a strike price that is below the current market price of the asset they wish to protect. At the same time, they would sell a call option with a strike price that is above the current market price. This creates a range or "collar" within which the asset's price can fluctuate without affecting the investor's overall position.

The premium earned from selling the call option offsets the cost of purchasing the put option, resulting in a zero net cost for the investor. However, this strategy also limits the investor's potential gains if the asset's price rises above the strike price of the call option, as they will be obligated to sell the asset at the lower strike price. Similarly, the strategy limits potential losses if the asset's price falls below the strike price of the put option, as the investor can sell the asset at the higher strike price.

Zero cost collars are commonly used by investors to protect against downside risk while retaining the ability to participate in potential upside. They are frequently used in the stock market but can also be applied to other assets such as commodities or currencies. However, they require careful consideration of the strike prices and expiration dates of the options involved to ensure that the investor's goals are met.