Fence

Fence (also known as a Dutch Rudder) is an investment strategy that uses options to limit the range of possible returns on a financial instrument.[1]

A fence consists of the following elements:

* long position in a financial instrument (e.g. a share, index or currency)
* long put (normally with a strike price close to or at the current spot price of the financial instrument)
* short put (with a strike price lower than the bought put - e.g. 80% of the current spot price)
* short call (with a strike price higher than the current spot price).

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 is 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 (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.

## References

1. ↑ "Fence (Options) Definition | Investopedia". http://www.investopedia.com/terms/f/fence-options.asp.

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Derivatives market

Derivative (finance)

Options|

| Terms|

* Credit spread
* Debit spread
* Exercise
* Expiration
* Moneyness
* Open interest
* Pin risk
* Risk-free interest rate
* Strike price
* the Greeks
* Volatility

|

Vanilla options|

* American
* Bond option
* Call
* Employee stock option
* European
* Fixed income
* FX
* Option styles
* Put
* Warrants

Exotic options|

* Asian
* Barrier
* Basket
* Binary
* Chooser
* Cliquet
* Commodore
* Compound
* Forward start
* Interest rate
* Lookback
* Mountain range
* Rainbow
* Swaption

Combinations|

* Collar
* Covered call
* Fence
* Iron butterfly
* Iron condor
* Straddle
* Strangle
* Protective put
* Risk reversal

Spreads|

* Back
* Bear
* Box
* Bull
* Butterfly
* Calendar
* Diagonal
* Intermarket
* Ratio
* Vertical

Valuation|

* Binomial
* Black
* Black–Scholes model
* Finite difference
* Garman–Kohlhagen
* Margrabe's formula
* Put–call parity
* Simulation
* Real options valuation
* Trinomial
* Vanna–Volga pricing

Swaps|

* Amortising
* Asset
* Basis
* Conditional variance
* Constant maturity
* Correlation
* Credit default
* Currency
* Dividend
* Equity
* Forex
* Forward Rate Agreement
* Inflation
* Interest rate
* Overnight indexed
* Total return
* Variance
* Volatility
* Year-on-Year Inflation-Indexed
* Zero Coupon Inflation-Indexed
* Zero Coupon Swap

* Forwards
* Futures

* Contango
* Currency future
* Dividend future
* Forward market
* Forward price
* Forwards pricing
* Forward rate
* Futures pricing
* Interest rate future
* Margin
* Normal backwardation
* Single-stock futures
* Slippage
* Stock market index future

Exotic derivatives|

* Energy derivative
* Freight derivative
* Inflation derivative
* Property derivative
* Weather derivative

Other derivatives|

* Collateralized debt obligation (CDO)
* Constant proportion portfolio insurance
* Contract for difference
* Credit-linked note (CLN)
* Credit default option
* Credit derivative
* Equity-linked note (ELN)
* Equity derivative
* Foreign exchange derivative
* Fund derivative
* Interest rate derivative
* Mortgage-backed security
* Power reverse dual-currency note (PRDC)

Market issues|

* Consumer debt
* Corporate debt
* Government debt
* Great Recession
* Municipal debt
* Tax policy

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