Box Spread
Candlefocus EditorA bull call spread is an options strategy that involves buying a call option and selling a higher strike option with the same expiration date. It is designed to benefit from upward price movements in the underlying instrument.
Meanwhile, a bear put spread is an options strategy that involves buying a put option and selling a lower strike option with the same expiration date. It is designed to benefit from downward price movements in the underlying instrument. By combining the two, a box spread creates a market-neutral portfolio where gains from one spread offset losses from the other one.
The ultimate payoff of a box spread will be equal to the difference between the strike prices of the two spreads. To determine the current market value of a box spread, the main considerations are the expiration date and the volatility of the underlying instrument. Generally, the longer the time to expiration, the lower the box spread market price.
It is important to take commissions into account when assessing the potential profitability of a box spread. Commissions normally represent a significant part of the total costs of implementing a box spread.
In addition to providing a potential riskless profit, traders also use box spreads for cash management purposes. By buying a box spread, traders can synthetically borrow at a higher interest rate and pay a lower interest rate when they sell the position. In effect, they are making an arbitrage trade to profit from the differences in the interest rates of different instruments.
In conclusion, a box spread is a popular options trading strategy used to achieve riskless profits. It is a combination of a bull call spread and a bear put spread that attempts to capitalise on the difference between the two options’ strike prices. The ultimate payoff of a box spread is always equal to the difference between the two strike prices. In addition to being potentially profitable, traders also use box spreads for cash management purposes.