What Is a Zero-Cost Strategy?

The term zero-cost strategy refers to a trading or business decision that does not entail any expense to execute. A zero-cost strategy costs a business or individual nothing while improving operations, making processes more efficient, or serving to reduce future expenses. As a practice, a zero-cost strategy may be applied in a number of contexts to improve the performance of an asset.

How Zero-Cost Strategies Work

Employing a zero-cost strategy means there are no additional expenses to make improvements or additions to the activities of a business or other entity. As mentioned above, an individual or business can cut future expenses, as well as simplify and streamline its current processes by using zero-cost strategies.

Zero-cost trading strategies can be used with a variety of assets and investment types, including equities, commodities, and options. Zero-cost strategies also may involve the simultaneous purchase and sale of an asset with like costs that cancel each other out.

In investing, a zero-cost portfolio may see an investor build a strategy based on going long in stocks that are expected to go up in value and short stocks that are expected to fall in value—a long/short strategy.

For example, an investor may choose to borrow $1 worth of Google stock and sell the $1 stake in Google, then reinvest that money into Apple. After a year, assuming the trade has gone as expected, the investor sells Apple to buy back and return the stock of Google they borrowed. The return on this zero-cost strategy is the return on Apple minus the return on Google. One important point to note is that this scenario ignores margin requirements.

Examples of Zero-Cost Strategy

A company that seeks to increase its efficiency while also reducing costs may decide to buy a new network server to replace several older ones. Because of advances in technology, the older servers are resold and the sum earned from the sale pays for the new server, which is more efficient, works faster, and reduces costs going forward due to lower maintenance and energy costs. A practical application of a zero-cost business strategy for an individual may be to improve sales prospects for a home by decluttering all the rooms, packing excess belongings into boxes, and moving the boxes to the garage. Because the labor is free, no cost is incurred.

Zero-Cost Strategies in Options Trading

One example of a zero-cost trading strategy is the zero-cost cylinder. In this options trading strategy, the investor works with two out-of-the-money options, either buying a call and selling a put, or buying a put and selling a call. The strike price—the price at which the contract can be bought or sold—is chosen so that the premiums from the purchase and sale effectively cancel each other out. Zero-cost strategies help reduce risk by eliminating upfront costs.

Another example of a zero-cost strategy in options trading involves setting up several options trades simultaneously for which the premiums from the net credit trades offset the net debit trade premiums. With such a strategy, profits are determined by the performance of the assets rather than transaction costs.

Advantages and Disadvantages of Zero-Cost Strategies in Trading

Pros of Zero-Cost Strategies in Trading

Zero-cost strategies have the main benefit of often having less expensive up front than other investing strategies. As a result, small-capital individual investors may find them to be easier to access. In addition, risk in a portfolio can be managed using zero-cost solutions. Investors, for example, might restrict their potential losses while keeping upside potential by using options. Income can be generated in a portfolio using zero-cost solutions. For example, by selling covered calls on a stock, investors can earn premiums while still owning the equity. Plus, an individual investors' needs can be met by tailoring zero-cost strategies. Investors, for example, can change their risk and return profile by using different strike prices or expiration dates on options. Last, zero-cost strategies can be an effective way for new investors to learn. These options, because they have minimal upfront costs, allow investors to acquire them to gain experience and knowledge they can use and apply for future investment decisions.

Cons of Zero-Cost Strategies in Trading

Zero-cost techniques frequently include limiting an investor's potential profit. When employing options, the premium earned for selling an option limits the possible profit from the deal, even if the price of the underlying asset advances in the investor's favor. Some zero-cost solutions have the potential to enhance an investor's overall risk exposure. Using options might carry significant risk, especially if the options expire out of the money. Also, certain zero-cost techniques necessitate holding holdings for extended periods of time, which might expose the investor to unanticipated changes in the market or the underlying asset.

Zero-cost strategies can be more complex than other investment strategies. In addition, zero-cost methods frequently entail a concentrated investment in a particular asset or market segment. This can reduce diversification, raising overall portfolio risk.

Finally, despite their moniker, zero-cost techniques are not without danger. If the price of the underlying asset goes against the investor's position, they can still lose money, especially if they use leverage or complicated financial instruments. Therefore, a zero-cost strategy is only aptly name in the initial acquisition of the investment and not the long-term implications of the investment.

Advantages and Disadvantages of Zero-Cost Strategies in Corporate Business

Pros of Zero-Cost Strategies in Business

A corporate zero-cost strategy can help businesses cut costs by eliminating or lowering upfront fees. This can free up resources for other objectives, such as expansion projects, research and development, or debt repayment. This zero-cost strategy can also enhance cash flow by lowering upfront costs,

Risk management in a corporation can be accomplished through the deployment of zero-cost strategies. Companies might use options or other financial instruments to hedge against price swings or other risks that could affect their profitability. Because these strategies may often have no upfront strings attached, these strategies can provide companies with more flexibility in pursuing growth initiatives or other business opportunities.

In some ways, companies that use zero-cost strategies may have a competitive advantage over their peers, especially if their peers must incur costs for the same strategies. For example, a company may already have access to or have already made an investment that now represents a sunk cost. By leveraging this added benefit, companies may enter new markets, exploit new technologies, or outperform others if they are able to implement zero-cost strategies where others can not.

Cons of Zero-Cost Strategies in Business

Zero-cost techniques still have the potential to limit a company's ability to invest in growth projects or other opportunities. Companies may be unable to make the necessary investments in technology, infrastructure, or talent if they reduce upfront expenses. In addition, a zero-cost strategy may incur costs in the future the company may not be able to handle. Similar to the trading disadvantages discussed before, some zero-cost strategies might raise a company's overall risk profile. Using financial instruments such as options or derivatives might expose a corporation to large losses if the market turns against them. Some stakeholders may interpret zero-cost methods as a sign of financial insecurity or a lack of long-term vision. This might have a negative influence on a company's reputation and capacity to attract investors, partners, or consumers. This may be especially true for higher-end products that often require substantial research and development investment prior to a product being brought to market.

Last, because the barrier of entry for a zero-cost corporate strategy may be very low, these strategies may be ineffective because so many market participants may be able to emulate the endeavor. As there is no restriction on capital to prevent some market participants from entering the space, there may be more competition and lower profit margins with these strategies.

The Bottom Line

A zero cost strategy is an investment strategy that aims to reduce or eliminate the upfront cost of implementing an investment or business initiative. The goal of a zero cost strategy is to generate returns or achieve a specific outcome without incurring significant expenses. In trading, this is done by executing contracts that do not incur a fee. In business, this is done by entering into markets or product lines that do not require upfront investments.