Fence (finance)


Fence is an investment strategy that uses options to limit the range of possible returns on a financial instrument.
A fence consists of the following elements:
The expiration dates of all the options are usually the same. The call strike is normally chosen in such a way that the sum total of the three option premiums are equal to zero.
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. Thus possible gains and losses 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.