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Fence
A strategy that involves purchasing an out-of-the-money call option while simultaneously selling an out-of-the-money put option (long collar), or purchasing an out-of-the-money put option and selling an out-of-the-money call option (short collar), with the same expiration date and the same underlying, in exchange for a reduced premium equal to the difference between the premiums on the two options.
Used as a hedge, this strategy consists in defining a range within which the investor assumes the price risk on the underlying. The investor is protected against adverse price changes in the underlying outside the range and, to reduce the cost of such protection, the investor waives any favourable price changes in the underlying outside the range.
Translations
Synonyms and variations
- Collar 1.
- Cylinder
- Range forward
- Range forward contract
- Risk reversal
- Tunnel