A collar option is a similar strategy offering the same benefits and drawbacks. The main difference is that the collar uses only two options i. For both strategies, the premium collected by selling options partially or fully offsets the premium paid to buy the long put. The goal of a fence is to lock in an investment's value through the expiration date of the options.
Because it uses multiple options, a fence is a type of combination strategy, similar to collars and iron condors. Both fences and collars are defensive positions, which protect a position from a decline in price, while also sacrificing upside potential. The sale of the short call partially offsets the cost of the long put, as with a collar.
Why regarding it?
However, the sale of the out-of-the-money OTM put further offsets the cost of the more expensive at-the-money ATM put and brings the total cost of the strategy closer to zero. Another way to view a fence is the combination of a covered call and an at-the-money ATM bear put spread.
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To create a fence, the investor starts with a long position in the underlying asset, whether it is a stock , index , commodity , or currency. The trades on the options, all having the same expiry, include:. All options have three months to expiration.
Bryan Doherty: A 'fence' option strategy
Of course, this is an ideal result. The underlying asset may not trade right at the middle strike price, and volatility conditions can skew prices one way or the other. However, the net cost or debit should be small. A net credit is also possible. Advanced Options Trading Concepts. Your Privacy Rights.
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To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. The option fence has numerous names, among which are: a cylinder option , a flexible forward , a zero-cost tunnel , and a mini-max. Read more Comments Last update: Mar 23, If you are interested in supporting this website and would like to contribute, kindly see the support page.
Fencing at schools – Education in New Zealand
Sponsored ads. This investment strategy will ensure that the value of the investment at expiry will be between the strike price on the short call and the strike price on the long put.
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Thus possible gains and losses the value of the financial instrument minus the cost of acquiring it are confined to a specified range. However, if the price of the financial instrument falls below the strike level of the sold put the investor will start participating in any further price declines of the financial instrument.
The “On the Fence” Trade
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