Fence is an investment strategy

Investment strategy

In finance, an investment strategy is a set of rules, behaviors or procedures, designed to guide an investor's selection of an investment portfolio...

 that uses options

Option (finance)

In finance, an option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price. The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the...

 to limit the range of possible returns on a financial instrument.

A fence consists of the following elements:

• long
  Long (finance)
  In finance, a long position in a security, such as a stock or a bond, or equivalently to be long in a security, means the holder of the position owns the security and will profit if the price of the security goes up. Going long is the more conventional practice of investing and is contrasted with...
  
   position in a financial instrument (e.g. a share
  Share
  Share may refer to:to some dume life* To share a resource is to make joint use of it; see sharing.* Share , a man who writes Urdu poetry* Share , a stock or other security such as a mutual fund...
  
  , index
  Index (economics)
  In economics and finance, an index is a statistical measure of changes in a representative group of individual data points. These data may be derived from any number of sources, including company performance, prices, productivity, and employment. Economic indices track economic health from...
  
   or currency
  Currency
  In economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...
  
  )
• long put
  Put option
  A put or put option is a contract between two parties to exchange an asset, the underlying, at a specified price, the strike, by a predetermined date, the expiry or maturity...
  
   (normally with a strike price
  Strike price
  In options, the strike price is a key variable in a derivatives contract between two parties. Where the contract requires delivery of the underlying instrument, the trade will be at the strike price, regardless of the spot price of the underlying instrument at that time.Formally, the strike...
  
   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
  Call option
  A call option, often simply labeled a "call", is a financial contract between two parties, the buyer and the seller of this type of option. The buyer of the call option has the right, but not the obligation to buy an agreed quantity of a particular commodity or financial instrument from the seller...
  
   (with a strike price higher than the current spot price)

The expiration dates

Expiration date

Expiration date can refer to:*The shelf life of a grocery item*Expiration *Copyright expiration*Expiration Date , a 2006 comedy* Expiration Date, a novel by Tim Powers...

 of all the options are normally the same. The call strike is normally chosen in such a way that the sum total of the three option premiums

Premium

Premium may refer to:* Premium , a promotional item that can be received for a small fee when redeeming proofs of purchase that come with or on retail products....

 are equal to zero.

This investment strategy will ensure that the value of the investment at expiry will be between the strike price

Strike price

In options, the strike price is a key variable in a derivatives contract between two parties. Where the contract requires delivery of the underlying instrument, the trade will be at the strike price, regardless of the spot price of the underlying instrument at that time.Formally, the strike...

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 within 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.