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.
Related Terms
The term calendar spread refers to a neutral strategy that involves options with the same underlying stock and strike price but different expiration dates. Calendar spreads are a low risk, low return option strategy that profits from volatility and the passage of time.
Moneyzine EditorJanuary 9th, 2024
The term butterfly spread refers to a neutral strategy involving a combination of bull and bear spreads using three strike prices. Butterfly spreads are considered a limited profit, limited risk option strategy.Moneyzine EditorNovember 6th, 2024
The term backspread refers to an investment strategy that involves buying more long position options than short positions. Backspreads provide the investor with relatively large exposure to any movement in the underlying security.Moneyzine EditorNovember 6th, 2024
The term averaging down refers to an investment strategy that involves buying additional shares of stock at a lower price than originally paid. Averaging down effectively lowers the average price paid per share of stock.Moneyzine EditorNovember 6th, 2024
