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Derivatives

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  • February 19, 2023
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Fence

The purchase of one option and the sale of a different-type option with a different strike price. In other words, it is an option spread which consists of a long (short) call and a short (long) put, both being struck out-of-the-money and expiring on the same date.

The fence is similar to an outright purchase or sale at prices belonging to a band. The band is bounded by the two strike prices. A costless fence can be established by choosing the strike prices in a way that the purchase (sale) price of the call is exactly offset by the sale (purchase) price of the put.

It is also known as a collar.

 


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