Zero-Cost Strategy - Explained
What is a Zero-Cost Strategy?
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Table of ContentsWhat is a Zero-Cost Strategy?How does a Zero-Cost Strategy Work? Zero-Cost Strategy ExamplesZero-Cost Strategy and Options Trading
What is a Zero-Cost Strategy?
A zero-cost strategy is a business or trading decision that does not incur any expense. A zero-cost strategy costs an individual or business nothing while simultaneously improving operations, making processes more effective, or serving to mitigate future expenses. As a practice, a zero-cost strategy might be applied to several contexts to enhance an assets performance.
How does a Zero-Cost Strategy Work?
Zero-cost trading strategies can be utilized with various investment and asset types, including options, commodities, and equities. Zero cost strategies also might involve simultaneously buying and selling an asset such that both costs cancel each other out. In investing, a zero-cost portfolio might see an investor create a strategy based on going long stocks which are expected to rise in value and short stocks which are expected to drop in value (long/short strategy). For instance, an investor might decide to borrow $1 of Facebook stock and then sell the $1 stake in Facebook, then go on to reinvest the money into twitter. After a year, supposing the trade played out as expected, the investor sells Twitter in order to buy back and then return the Facebook stock they borrowed. This zero-cost strategys return is the return on twitter minus the return on Facebook (note: this example leaves out margin requirements).
Zero-Cost Strategy Examples
A company seeking to increase its efficiency and simultaneously reducing costs might decide to purchase a new network server to replace some older ones. Due to technological advancement, the older servers are resold and the amount generated from its sale pays for the new server, which is more effective, faster, and would reduce costs moving forward as a result of energy costs and lower maintenance. A practical application of a zero-cost business strategy for an individual may be to enhance sales prospects for a house by decluttering every room, packing excess belongings into boxes, and then moving those boxes into the garage. Because the labor is free, there is no cost incurred.
Zero-Cost Strategy and Options Trading
The zero-cost cylinder is one instance of a zero-cost trading strategy. In this strategy of options trading, the investor works with two out-of-the-money options, either placing a buy call and sell put or buy put and sell call. The strike price is chosen in order for the premiums from buying and selling effectively cancel out each other. Zero-cost strategies help mitigate risk by removing upfront costs. Another instance of a zero-cost strategy in options trading includes opening several options trades simultaneously for which the premiums from the net credit trades offset the net debit trade premiums. With a strategy such as this, the performance of the assets determines the profits as against transaction costs.