Fence (Options)

AAA

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 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.

RELATED TERMS
  1. Collar

    1. A protective options strategy that is implemented after a ...
  2. Put Option

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

    A call option with a strike price that is higher than the market ...
  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 ...
RELATED FAQS
  1. What does the underlying of a derivative refer to?

    A derivative security is a financial instrument in which the price of the derivative is dependent on its underlying asset. ... Read Full Answer >>
  2. What kinds of derivatives are types of contingent claims?

    A contingent claim is another term for a derivative with a payout that is dependent on the realization of some uncertain ... Read Full Answer >>
  3. What does it mean to take delivery of a derivative contract?

    When trading derivative contracts for options, a buyer or holder may have to take delivery of the underlying asset if the ... Read Full Answer >>
  4. How can derivatives be used for speculation?

    Derivative securities could be bought or sold to speculate on the future price of the underlying assets. Derivative securities' ... Read Full Answer >>
  5. What does it mean to roll a derivative contract?

    A derivative is a financial instrument in which the price of the derivative is dependent on an underlying asset. A derivative ... Read Full Answer >>
  6. How can derivatives be used for risk management?

    Derivatives could be used in risk management by hedging a position to protect against the risk of an adverse move in an asset. ... Read Full Answer >>
Related Articles
  1. Options & Futures

    Market Volatility Strategy: Collars

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

    Using LEAPS With Collars

    This options strategy will help you lock in profit while keeping your upside potential.
  3. Options & Futures

    Don't Forget Your Protective Collar

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

    Costless Collars: Because Asset Allocation Is Not Enough

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

    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.
  6. Investing

    What More Volatility Means For Momentum Stocks

    One byproduct of the recent tick higher in bond yields: a meaningful rise in volatility for both stocks and bonds.
  7. Options & Futures

    How & Why Interest Rates Affect Options

    The Fed is expected to change interest rates soon. We explain how a change in interest rates impacts option valuations.
  8. Investing

    Should You Average Down When Trading Stocks?

    Averaging down on a stock can allow you to avoid having to admit you are wrong. On top of this and given enough time, the strategy can result in a profit.
  9. Investing Basics

    Understanding Notional Value

    This term is commonly used in the options, futures and currency markets because a very small amount of invested money can control a large position.
  10. Options & Futures

    The Risks Of Writing Covered Calls

    While writing a covered call option is less risky than writing a naked call option, the strategy is not entirely riskfree.

You May Also Like

Hot Definitions
  1. Net Worth

    The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure ...
  2. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  3. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  4. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  5. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  6. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
Trading Center