Fences Option Strategy

A fence is the purchase of one option and sale of a different option with a different strike. The purchase of 1 July 105 call for $3, and the sale of 1 July 95 put for $3 is an example of buying a bull fence for even money.

An example of a bear fence is the purchase of the August 95 put for $2 and sale of the August 105 call for $2, for even money. Here show the profit and loss potential at expiration of the purchase of a bear fence.

The fence has characteristics similar to an outright purchase or sale, outside the extremes of the strike prices of 95 and 105. Fences are often traded by hedgers or speculators who need to automatically buy or sell at certain price levels.

Spreads with Different Expirations

Another realm of option trading is buying or selling of one or more options, and the simultaneous selling of one or more options with a different expiration. These spreads can be more difficult to analyze because volatility and time considerations become crucial for proper evaluation. The relationship between the months of the futures contracts such as the possibility of a normal or inverted market, also becomes critical for correct evaluation.