What is a fence?
Also known as a collar, it is an option strategy that puts a restriction around a commodity or a security in order to protect profits. This strategy involved buying multiple options, which are all due to expire at around the same time.
Where have you heard about fences?
If you have a working knowledge of different strategies used in the options market, you’ll likely have come across fences. It’s used by investors to limit the movement of an option investment return, in the same way that a fence in real life would be used to keep property within set boundaries.
What you need to know about fences.
Typically, an investor looking to employ the fence strategy would buy a security (a long position), a long put with a strike price close to the spot price of the security, a short put with a strike price lower than the spot price of the security and a short call with a strike price higher than the spot price of the security. These option premiums should theoretically balance each other out. This results in a net derivative investment of zero while the underlying security is bought or when the security expires.
Find out more about fences.
To find out more about fences, it’s useful to understand strike price.