An option-based strategy that is designed to establish a costless position and secure a return. It is a type of positive carry collar that is constructed by simultaneously purchasing and selling of out-of-the-money calls and puts with the strike prices of which creating a band encircled by an upper and lower bound. The call and put options take on the role of caps and floors, respectively. For example, an investor may buy a put at a given strike and sell a call at a lower strike. The sale of the call (the short call) places a cap on returns if the underlying falls in price. It also offsets the long put, i.e., sets the cost of the whole strategy to zero.
The equity collar has plenty of names including: equity risk reversal, zero-cost option, zero-cost collar, free collar, min max, zero cost hedge, forward rate bracket, range forward contract, tunnel option, hedge wrapper, cap and floor, interest rate collar, among others.
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