Fence
A fence entails buying a futures contract and hedging it with the purchase of an out-of-the-money put and the sale of an out-of-the-money call. The premium received from the call sale is used to subsidize the purchase of the put. Therefore, the net cost is low but the upside profit potential is limited.
A fence offers a hedger unlimited downside protection by essentially creating a minimum value on physical inventory. Profits are limited if prices rally to the call's strike price or higher. The profit/loss profile is the same as a bull call spread strategy.
Position Premium Dollar Premium Delta Buy one $20 crude oil futures +1.00 Buy one $18 crude oil put $0.50 $500 -.24 Sell one $22 crude oil call $0.50 $500 -.29 Net credit $0.00 $0 Net delta +.42 Maximum risk $2,000 per position Maximum profit $2,000 per position Break-even futures price $20 Position Premium Dollar Premium Delta Buy one $260 gold futures +1.00 Buy one $250 gold put $3.00 $300 -.30 Sell one $270 gold call $3.00 $300 -.30 Net credit $0.10 $10 Net delta +.40 Maximum risk $1,000 Maximum profit $1,000 per position Break-even futures price $260
THERE IS A RISK OF LOSS IN FUTURES TRADING AND IS NOT SUITABLE FOR
ALL INVESTORS. ONLY RISK CAPITAL SHOULD BE USED WHEN TRADING FUTURES.
Copyright 2008 Capitol Commodity Services, Inc. All Rights Reserved.
Education
- Futures Education
- Options Information
- Options Strategies
- Long At-the-Money Call
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- Long Strangle
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- Short Strangle
- Call Ratio Backspread
- Put Ratio Backspread
- Synthetic Long Put
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- Fence
