Zero Cost Collars (Fences)
A collar, also known as a fence, allows the hedger to define a maximum and minimum price for a given period of time. The hedge involves the purchase of one option and the sale of another.

A collar is created by purchasing a put option and selling a call option. The strike prices can be defined by the hedger. Often hedgers prefer a “zero cost” collar, which includes the sale of one option and the purchase of another at the same price. Since one option premium offsets the other, there is no excess premium. However, there is no “free lunch” in a costless premium trade. The hedger still accepts the risk of the short option which may be unlimited and unsuitable in some cases. A collar hedge typically will force the hedger to post initial margin to safeguard against any loss incurred.

If the hedger is long a swap, a LOWER market price will result in a position loss. In the event of a HIGHER price, the hedger may have excess margin in their account which can be accessed at any time. This process will repeat until the expiry of the contract.

Producer

How it works
An energy producer will want to have a minimum price for the sale of its product in a given time period. It will buy a put and offset the cost with the sale of a call. The width of the collar (also known as the spread or distance between strikes) is defined by market price and desired floor price and put value.

 

 

 

 

 

 

 

 

 

Consumer

How it works

 

 

 

 

 

 

 

 

Limited Risk Collar

How it works
A collar can be modified to limit many potential risks of loss. HCEnergy works with its clients to ensure the best fit of hedges and risk tolerance. Please contact us for further details.