Definition
The term box spread refers to a four-sided option involving a bear and bull spread with identical expiration dates. Box spreads can provide the investor with an arbitrage opportunity, with the trader assuming a nearly riskless position.
Explanation
A box spread is a four-sided option involving a long call and a short put at one strike price in addition to a short call and a long put at a different strike price. The strategy involves minimal risk but may allow the investor to assume an arbitrage position that provides a very small return upon expiration of the contracts.
A box spread consists of four offsetting options with the same expiration date, with each set of options using a different strike price. For example, the investor would buy a call and sell a put at one strike price and couple this with the buying of a put and selling of a call at a different strike price. All four of these options would expire on the same date.
Example
An example of a box spread construct would be as follows:
Purchasing 1 ABC June 30 call, while writing 1 ABC June 35 call, and at the same time;
Purchasing 1 ABC June 35 put, while writing 1 ABC June 30 put.