Fence (Options)


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.

BREAKING DOWN '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.

  1. Put Option

    An option contract giving the owner the right, but not the obligation, ...
  2. Out Of The Money - OTM

    A call option with a strike price that is higher than the market ...
  3. Collar

    1. A protective options strategy that is implemented after a ...
  4. Covered Call

    An options strategy whereby an investor holds a long position ...
  5. Call Option

    An agreement that gives an investor the right (but not the obligation) ...
  6. Risk

    The chance that an investment's actual return will be different ...
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