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Definition

Box Spread

What is a Box Spread?

A Box Spread is an alternative trading strategy that involves buying a bull call spread and a bear put spread simultaneously. It is made up of two vertical spreads with identical strike prices and expiration dates.

Understanding of Box Spread

A box spread is the best option when the spreads collectively are mispriced concerning their expiration prices. For example, when traders decide the spreads are too expensive, they may use a short box, which utilizes the opposing alternative pairs. Whenever one analyzes the two vertical spreads implicated, the bull call and bear put, the concept of a box arises.

Futures traders can use these box spreads. The approach uses two butterfly spreads to create evenly spaced or continuous contracts. For example, a double butterfly is commonly used for a box spread in futures trading.

The conventional notion is that spreads don't vary much when negotiating with futures because they're not directional. Instead, they tend to trade in a range. When dealing with futures, the spread creates an ensuring natural tradition on Pascal's Triangle properties.

Practical Example

The price of a stock of company X is $51. Each of the four legs of the box's options contracts holds 100 shares. The strategy is to:

For $229 debit per options contract, buy the $39 calls for $2.29 (ITM).

For $113 credit, sell the 43 calls for 1.13 (OTM).

For $259 debit, buy the 43 put for 2.59 (ITM).

For an $87 credit, sell the 39 put for 0.87 (OTM).

Before commissions, the total cost of the trade would be $229 - $113 + $259 - $87 = $288. 43 - 39 = 4 is the spread between the strike prices. The box spread is $400 when multiplied by 100 shares per contract.

The deal can make a profit of $12 before commissions. To be effective, the commission fee for all four legs of the trade must be less than $12. That's a sharp range, and it only applies when the box's real benefit is less than the spreads' expiry price or the gap between the strikes.

In Sentences

  • The term box spread is widely used to indicate an alternate trading method that jointly purchases a bull call, and a bear put spread.

 

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