How is a fence collar constructed for zero-cost hedging?

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AcadiFi · Accepted Answer

A fence collar is a hedging structure combining a long OTM put (protection) with a short OTM call (premium offset) while holding the underlying. The strikes are chosen so the call premium equals the put cost, producing zero net outlay. Example: you hold 10,000 shares at $80. Buy the 75 put for $1.80 and sell the 88 call for $1.80. Below 75, the put caps your loss at $5 per share ($50,000 total). Above 88, the short call forces you to deliver at $88, capping upside gain at $8 per share. Between 75 and 88, you participate fully in stock movement. ```mermaid flowchart TB A[Long Stock
$80] --> B{Fence Collar} C[Buy Put
Strike 75] --> B D[Sell Call
Strike 88] --> B B --> E[Protected Range
75 to 88] ``` Fence collars suit executives under trading restrictions, pension funds unwilling to monetize positions, and family offices concentrated in founder stock. The key design choice is symmetric versus asymmetric strikes—widening the call strike gives more upside but requires paying residual premium. Tax treatment varies by jurisdiction since collars may trigger constructive sale rules if they effectively eliminate market risk.

How is a fence collar constructed for zero-cost hedging?

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