Fence

A fence is an options trading strategy that involves buying a protective put and selling a call option on the same underlying asset. The protective put limits potential losses if the asset's price declines, while the sold call generates income but caps the upside potential if the asset's price rises significantly. This approach creates a "fence" around the asset’s price movements, allowing the investor to manage risk with defined boundaries.

Example

An investor owns 1,000 shares of Company X, trading at $50 per share. To protect against a potential drop in price, the investor buys a put option with a strike price of $48 and simultaneously sells a call option with a strike price of $52. If the share price falls below $48, the put option mitigates losses, and if the price rises above $52, the gains are capped due to the sold call option.