What Is A Box Spread In Options Trading?

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A box spread is an options trading strategy that enables traders to profit from arbitrage. Arbitrage is the process by which a profit is derived by taking advantage of differences in price for identical or similar assets on different markets or different forms.

To execute a box spread, a trader would use both a bull call spread and a bear put spread, all with the same expiration dates and the same strike prices. If executed correctly, traders can make an arbitrage profit when the spreads are underpriced in relation to their expiration values.

This article will break down the box spread, cover what a spread is, discuss how the box spread is formed, and detail how to use it in your trading.

What Is A Spread? 

Simply put, a spread is when a trade derives value from the difference in prices between two or more assets. For example, if you were to sell a stock at $60 whilst buying the same stock at $50, your spread would be $10. You can do the same thing with options; selling an option contract to offset the price of purchasing a similar option contract that’s nearer to-the-money.

By adopting this approach, a trader can reduce the level of risk they take on when purchasing an options contract. The disadvantage is that the potential profit from the position is limited due to the act of simultaneously selling an option. Spreads can be achieved in either direction (i.e. bullish or bearish) through the use of call options or put options.

What Is A Box Spread? 

A box spread is a special type of spread that relies on favorable option pricing to provide a risk-free arbitrage opportunity. A box spread involves simultaneously executing both a bull call spread and a bear put spread. Since the trader is using two spreads that offset each other, an arbitrage profit is made when the value exceeds the total cost of the premiums.

For example, say that ABC company is currently trading at $55 and you spot an opportunity to profit from a box spread. You execute the first part of the box spread (the bull call spread) by buying a call option with a $50 strike price, whilst simultaneously selling a call option with a $60 strike price. Then, you execute the second part of the box spread (bear put spread) by buying a put option with a $60 strike price, whilst simultaneously selling a put option with a $50 strike price.

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Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are ...

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Moon Kil Woong 3 weeks ago Contributor's comment

The short players who have been stocks have not been simply arbitrating and closing their positions. For example, the shorters of CYDY are clear and obvious because there is no options on that stock. If there was they could short even more through options. Those who were upset at those taking positions to purposely destroy companies and investors along the way have a point. The argument that some shorting is used for arbitrage is not only a slap in the face to those that know better. It is a lie to divert from the real wrath of those who are fed up with downward price manipulation and bullying from funds with plenty of money to hurt smaller players.