Fence (Options)


Fence (Options)

A fence or collar is an option strategy that establishes a trading band around a security or commodity, generally to protect profits. One form of a fence involves the sale of an out-of-the-money call option on an underlying security; all or part of the premium thus received is used to buy a protective out-of-the money put on the security. Both the call and the put have the same expiration date. The call option establishes a ceiling price for the security, while the put option establishes a floor price for it, effectively 'fencing' in the option.

A widely used variant of this option strategy involves a "costless collar," where the premium received through the sale of the call roughly equals the premium paid for the purchase of the put. The cost of protection in this case is therefore zero.

For example, an investor who wishes to construct a fence or collar around a stock in the portfolio that is trading at $50 could sell a call with a strike price of $53, and buy a put with a strike price of $47, both with, say, three months to expiration. If the premium received from the sale of the $53 call equals the premium paid for the $47 put, this would be a "costless collar", and "fence" in potential losses and profits.


Investment dictionary. . 2012.

Look at other dictionaries:

  • Options strategies — can favor movements in the underlying that are bullish, bearish or neutral. In the case of neutral strategies, they can be further classified into those that are bullish on volatility and those that are bearish on volatility. The option positions …   Wikipedia

  • Fence — A risk mitigating investment strategy that utilizes options to limit the possible range of returns. To employ a fence, the investor purchases a security (a long position), a long put with a strike price near the spot price of the security, a… …   Investment dictionary

  • Options spread — Spread option redirects here. For the American football offensive scheme, see Spread offense. Options spreads are the basic building blocks of many options trading strategies. A spread position is entered by buying and selling equal number of… …   Wikipedia

  • Real options valuation — Real options valuation, also often termed Real options analysis,[1] (ROV or ROA) applies option valuation techniques to capital budgeting decisions.[2] A real option itself, is the right but not the obligation to undertake some business decision; …   Wikipedia

  • Binomial options pricing model — BOPM redirects here; for other uses see BOPM (disambiguation). In finance, the binomial options pricing model (BOPM) provides a generalizable numerical method for the valuation of options. The binomial model was first proposed by Cox, Ross and… …   Wikipedia

  • Mountain range (options) — Mountain ranges are exotic options originally marketed by Société Générale in 1998. The options combine the characteristics of basket options and range options by basing the value of the option on several underlying assets, and by setting a time… …   Wikipedia

  • Credit spread (options) — Finance Financial markets Bond market …   Wikipedia

  • Valuation of options — Further information: Option: Model implementation In finance, a price (premium) is paid or received for purchasing or selling options. This price can be split into two components. These are: Intrinsic Value Time Value Contents 1 Intrinsic Value 2 …   Wikipedia

  • Ring Fence — A protection based transfer of assets from one destination to another, usually through the use of offshore accounting. A ring fence is meant to protect the assets from inclusion in an investor s calculable net worth or to lower tax consequences.… …   Investment dictionary

  • United States Border Patrol — For other uses of Border Patrol , see Border Patrol (disambiguation). United States Border Patrol Common name Border Patrol Abbreviation USBP …   Wikipedia


Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”

We are using cookies for the best presentation of our site. Continuing to use this site, you agree with this.