Investopedia

Continue to Site »

Fence (Options)

Filed Under » , ,
Dictionary Says

Definition of '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.

Investopedia Says

Investopedia explains 'Fence (Options)'

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.

Directory (Option Strategy)

  1.

    Alligator Spread

  2. Atlantic Spread

  3. Back Fee

  4. Backspread

  5. Bailard, Biehl And Kaiser Five-Way Model

  6. Bear Call Spread

  7. Bear Put Spread

  8. Bear Spread

  9. Bear Straddle

  10. Box Spread

  11. Bull Call Spread

  12. Bull Put Spread

  13. Bull Spread

  14. Bullet Trade

  15. Butterfly Spread

  16. Buy A Spread

  17. Calendar Spread

  18. Call Ratio Backspread

  19. Collar

  20. Collar Agreement

  21. Condor Spread

  22. Contingent Order

  23. Conversion Arbitrage

  24. Covered Call

  25. Covered Combination

  26. Covered Straddle

  27. Credit Spread

  28. Death Put

  29. Debit Spread

  30. Delta Hedging

  31. Delta Neutral

  32. Delta Spread

  33. Diagonal Spread

  34. Dividend Arbitrage

  35. Double One-Touch Option

  36. Fence (Options)

  37. Fiduciary Call

  38. Fixed Dollar Value Collar

  39. FMAN

  40. Forex Hedge

  41. Forex Option & Currency Trading Options

  42. Form 6781: Gains And Losses From Section ...

  43. Front Fee

  44. Gut Spread

  45. Heston Model

  46. Horizontal Spread

  47. Implied Volatility - IV

  48. Interest Rate Collar

  49. Iron Butterfly

  50. Iron Condor

  51. Leg

  52. Leg Out

  53. Long Jelly Roll

  54. Long Leg

  55. Long Put

  56. Long Straddle

  57. Long-Term Equity Anticipation Securities ...

  58. Married Put

  59. Modidor

  60. Multi Index Option

  61. Multi-Leg Options Order

  62. Naked Call

  63. Naked Option

  64. Naked Position

  65. Naked Put

  66. Negative Butterfly

  67. Net Option Premium

  68. Neutral

  69. Option Premium

  70. Outright Option

  71. Overwrite

  72. Overwriting

  73. Positive Butterfly

  74. Protective Put

  75. Put Calendar

  76. Put On A Call

  77. Put On A Put

  78. Put Ratio Backspread

  79. Put To Seller

  80. Ratio Call Write

  81. Ratio Spread

  82. Reverse Calendar Spread

  83. Reverse Conversion

  84. Risk Reversal

  85. Roll Down

  86. Roll Forward

  87. Roll Up

  88. Seagull Option

  89. Sell To Open

  90. Series 4

  91. Short Leg

  92. Short Straddle

  93. Straddle

  94. Strangle

  95. Swing Option

  96. Synthetic Dividend

  97. Variable Ratio Write

  98. VIX Option

  99. Writing An Option

  100. Zero Cost Collar

  101. Zomma

Articles Of Interest

  1.

    Using LEAPS With Collars

    This options strategy will help you lock in profit while keeping your upside potential.

  2. Don't Forget Your Protective Collar

    Guard your finances in uncertain times with a protective collar strategy, which provides short-term downside protection.

  3. Costless Collars: Because Asset Allocation Is Not Enough

    Collars are extremely flexible, and can be much more beneficial to your portfolio than asset allocation.

  4. Minimize Risk With The Long Collar

    Think your favorite stock is on the way down? This simple option-trading strategy can help you manage your risks without selling the stock.

  5. Putting Collars To Work

    Find out which protective or bullish collar will result in your optimal risk/return level.

  6. The Butterfly Spread

    A butterfly spread is a neutral options strategy with both limited risk and limited profit potential. The strategy involves four options contracts with the same expiration month but with three ...

  7. Making It Big On Wall Street

    Read about some of the most glamorous Wall Street jobs and what it takes to land one.

  8. Quants: The Rocket Scientists Of Wall Street

    Blend math, finance and computer skills to command a high - and well deserved - salary.

  9. Build A Baby Berkshire

    Get a piece of Warren Buffett's profit by using Form 13F to coattail his picks.

  10. Cash: A Call Option With No Expiration Date

    Cash is generally regarded as a drag on investment returns, but sometimes it may be preferable to hold a substantial cash amount instead of investing it in other assets. This is because having ...
comments powered by Disqus
Marketplace
Hot Definitions

  1. Glocalization

    A combination of the words "globalization" and "localization" used to describe a product or service that is developed and distributed globally, but is also fashioned to accommodate the user or consumer in a local market.

  2. Disaster Loss

    A special type of tax-deductible loss, similar to a casualty loss, where a loss has been incurred by taxpayers who reside in an area that has been designated as a federal disaster area by the President.

  3. Fool In The Shower

    The notion that changes or policies designed to alter the course of the economy should be done slowly, rather than all at once.

  4. Pattern Day Trader

    An SEC designation for traders who trade the same security four or more times per day (buys and sells) over a five-day period, and for whom same-day trades make up at least 6% of their activity for that period.

  5. Cost-Push Inflation

    A phenomenon in which the general price levels rise (inflation) due to increases in the cost of wages and raw materials.

  6. Happiness Economics

    The formal academic study of the relationship between individual satisfaction and economic issues, such as employment and wealth.
Trading Center
Array ( )
taggroups(for debug only):
Array ( [0] => Options And Futures [1] => SEG (Active Traders) [2] => SEG (Active Traders:Instrument-Options&Futures) [4] => Markets [11] => SEG (Investors) ) time:16ms