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Box Spread
Box Spread
Published: 2014/10/30
Channel: Ronald Moy
The Three Legged Box Spread
The Three Legged Box Spread
Published: 2016/08/02
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Box Spread Strategy
Box Spread Strategy
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What is BOX SPREAD? What does BOX SPREAD mean? BOX SPREAD meaning, definition & explanation
What is BOX SPREAD? What does BOX SPREAD mean? BOX SPREAD meaning, definition & explanation
Published: 2017/02/09
Channel: The Audiopedia
Box Spread
Box Spread
Published: 2014/06/03
Channel: munzir zulkifli
BOX SPREAD AND ZERO COST COLLAR
BOX SPREAD AND ZERO COST COLLAR
Published: 2014/06/28
Channel: Muhammad Izzat
How To Make Your Own Box Spread: The Straddle-Hedge Strategy
How To Make Your Own Box Spread: The Straddle-Hedge Strategy
Published: 2012/09/04
Channel: Nadex
The Victory Spread Options Trade
The Victory Spread Options Trade
Published: 2013/09/08
Channel: TheOptionClub
What are Options Box Spreads Q&A | Trade Options Like a DPM Webinars #2
What are Options Box Spreads Q&A | Trade Options Like a DPM Webinars #2
Published: 2010/08/17
Channel: Hamzei Analytics
The Backspread Option Strategy
The Backspread Option Strategy
Published: 2016/05/10
Channel: Owen Trimball
NADEX At The Money Spread Training
NADEX At The Money Spread Training
Published: 2015/07/15
Channel: BinaryTradeGroup
Why Vertical Debit Spreads Are Better Than Single Options
Why Vertical Debit Spreads Are Better Than Single Options
Published: 2016/11/21
Channel: Owen Trimball
Box Spread Strategy
Box Spread Strategy
Published: 2017/05/18
Channel: Fadma Aizza
Double Calendar Spread Option Trading Strategy
Double Calendar Spread Option Trading Strategy
Published: 2016/04/04
Channel: Owen Trimball
Trading in BOX Spreads Through FIST
Trading in BOX Spreads Through FIST
Published: 2014/07/31
Channel: Finideas Sol
Trading As A Business - The 3 Legged Box
Trading As A Business - The 3 Legged Box
Published: 2009/03/25
Channel: Christopher Smith
Advanced options trading:  Combining options call spreads with options put spreads
Advanced options trading: Combining options call spreads with options put spreads
Published: 2010/11/16
Channel: LibanmanFutures
Credit Spreads Option Strategy
Credit Spreads Option Strategy
Published: 2016/09/06
Channel: Owen Trimball
Nadex Bull & Bear Box Spread Strategy Examples
Nadex Bull & Bear Box Spread Strategy Examples
Published: 2012/07/02
Channel: Nadex
High Profits from Option Trading!
High Profits from Option Trading!
Published: 2015/11/22
Channel: Option Trader
Option Strategy - Butterfly Spread
Option Strategy - Butterfly Spread
Published: 2013/05/24
Channel: Ronald Moy
Diagonal Box Strategy
Diagonal Box Strategy
Published: 2014/11/13
Channel: JonC90644
How Options Market Makers Use Box Spreads | Trade Options Like a DPM Webinars #2
How Options Market Makers Use Box Spreads | Trade Options Like a DPM Webinars #2
Published: 2010/08/17
Channel: Hamzei Analytics
Investopedia Video: Butterfly Spread
Investopedia Video: Butterfly Spread
Published: 2013/08/20
Channel: Investopedia
Collar Options Strategy Tutorial
Collar Options Strategy Tutorial
Published: 2016/06/13
Channel: Options Tycoon
Victory Spread Preview
Victory Spread Preview
Published: 2009/10/02
Channel: ThePrincipletrader
Option Strategy using TOS Spread Hacker 10/10/2013
Option Strategy using TOS Spread Hacker 10/10/2013
Published: 2013/10/10
Channel: BeanzTrader Mapleleafnj
Option Strategy - Bear Spread
Option Strategy - Bear Spread
Published: 2013/05/24
Channel: Ronald Moy
Option Strategy - Bull Spread
Option Strategy - Bull Spread
Published: 2013/05/04
Channel: Ronald Moy
Option Strategies - Ratio Spreads and Back Spreads
Option Strategies - Ratio Spreads and Back Spreads
Published: 2014/10/09
Channel: Ronald Moy
The Call Calendar Spread Option Strategy
The Call Calendar Spread Option Strategy
Published: 2016/09/27
Channel: Owen Trimball
What is a Bear Spread?
What is a Bear Spread?
Published: 2015/11/21
Channel: Option Trader
Conversion, Reversal and Box | Video 164
Conversion, Reversal and Box | Video 164
Published: 2013/12/03
Channel: OpenMarkets Australia
How To Make Your Own Box Spread: The Straddle Hedge Strategy
How To Make Your Own Box Spread: The Straddle Hedge Strategy
Published: 2016/09/25
Channel: Theil Greene
Long Iron Butterfly | Options Trading Strategy Guide
Long Iron Butterfly | Options Trading Strategy Guide
Published: 2017/03/17
Channel: projectoption
How Nadex Spread Widths & Strikes Are Determined & Box Spread Basics
How Nadex Spread Widths & Strikes Are Determined & Box Spread Basics
Published: 2012/07/02
Channel: Nadex
Nadex Bull & Bear Box Spread Strategy Examples
Nadex Bull & Bear Box Spread Strategy Examples
Published: 2015/06/24
Channel: ApexInvesting
Nadex Bull & Bear Box Spread Strategy Examples
Nadex Bull & Bear Box Spread Strategy Examples
Published: 2016/09/25
Channel: Theil Greene
Iron Butterfly Option Spread
Iron Butterfly Option Spread
Published: 2015/09/23
Channel: Owen Trimball
Option Strategy - Straddle
Option Strategy - Straddle
Published: 2013/05/28
Channel: Ronald Moy
How a bear spread strategy works
How a bear spread strategy works
Published: 2013/04/12
Channel: Gary DeVries
Matching The Right Spread To The Right Trading Strategy
Matching The Right Spread To The Right Trading Strategy
Published: 2012/08/06
Channel: Nadex
The "Collar" Options Strategy
The "Collar" Options Strategy
Published: 2016/09/29
Channel: Peter Ghostine
Straddle Option Strategy
Straddle Option Strategy
Published: 2015/10/13
Channel: Owen Trimball
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How a bull spread strategy works
Published: 2013/04/12
Channel: Gary DeVries
How To Enter A Call Calendar Spread
How To Enter A Call Calendar Spread
Published: 2017/03/24
Channel: Option Alpha
Box Strategy
Box Strategy
Published: 2014/10/29
Channel: Kelly Lipscomb
Butterfly Spread
Butterfly Spread
Published: 2013/08/11
Channel: Garg University
Covered Calls - Option Strategies 3 Leg Box Strategy
Covered Calls - Option Strategies 3 Leg Box Strategy
Published: 2011/03/04
Channel: coveredcallvideo
Single-Leg vs  Multi-Leg Option Strategies
Single-Leg vs Multi-Leg Option Strategies
Published: 2015/01/06
Channel: Option Alpha
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WIKIPEDIA ARTICLE

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Profit diagram of a box spread. It is a combination of positions with a riskless payoff.

In options trading, a box spread is a combination of positions that has a certain (i.e. riskless) payoff, considered to be simply "delta neutral interest rate position". For example, a bull spread constructed from calls (e.g. long a 50 call, short a 60 call) combined with a bear spread constructed from puts (e.g. long a 60 put, short a 50 put) has a constant payoff of the difference in exercise prices (e.g. 10) assuming that the underlying stock does not go ex-dividend before the expiration of the options. If the underlying asset has a dividend of x, then the settled value of the box will be 10+x.[1] Under the no-arbitrage assumption, the net premium paid out to acquire this position should be equal to the present value of the payoff.

They are often called "alligator spreads" because the commissions eat up all your profit due to the large number of trades required for most box spreads.

The box-spread usually combines two pairs of options; its name derives from the fact that the prices for these options form a rectangular box in two columns of a quotation.

A similar trading strategy specific to futures trading is also known as a box or double butterfly spread.

Background[edit]

An arbitrage operation may be represented as a sequence which begins with zero balance in an account, initiates transactions at time t = 0, and unwinds transactions at time t = T so that all that remains at the end is a balance whose value B will be known for certain at the beginning of the sequence. If there were no transaction costs then a non-zero value for B would allow an arbitrageur to profit by following the sequence either as it stands if the present value of B is positive, or with all transactions reversed if the present value of B is negative. However, market forces tend to close any arbitrage windows which might open; hence the present value of B is usually insufficiently different from zero for transaction costs to be covered. This is considered typically to be a "Market Maker/ Floor trader" strategy only, due to extreme commission costs of the multiple-leg spread. If the box is for example 20 dollars as per lower example getting short the box anything under 20 is profit and long anything over, has hedged all risk .

A present value of zero for B leads to a parity relation. Two well-known parity relations are:-

  • Spot futures parity. The current price of a stock equals the current price of a futures contract discounted by the time remaining until settlement:

  • Put call parity. A long European call c together with a short European put p at the same strike price K is equivalent to borrowing and buying the stock at price S. In other words, we can combine options with cash to construct a synthetic stock:

Note that directly exploiting deviations from either of these two parity relations involves purchasing or selling the underlying stock.

The Box Spread[edit]

Now consider the put/call parity equation at two different strike prices and . The stock price S will disappear if we subtract one equation from the other, thus enabling one to exploit a violation of put/call parity without the need to invest in the underlying stock. The subtraction done one way corresponds to a long-box spread; done the other way it yields a short box-spread. The pay-off for the long box-spread will be the difference between the two strike prices, and the profit will be the amount by which the discounted payoff exceeds the net premium. For parity, the profit should be zero. Otherwise, there is a certain profit to be had by creating either a long box-spread if the profit is positive or a short box-spread if the profit is negative. [Normally, the discounted payoff would differ little from the net premium, and any nominal profit would be consumed by transaction costs.]

The long box-spread comprises four options, on the same underlying asset with the same terminal date. They can be paired in two ways as shown in the following table (assume strike-prices < ):

Long bull call-spread Long bear put-spread
Long synthetic stock Buy call at Sell put at
Short synthetic stock Sell call at Buy put at

Reading the table horizontally and vertically, we obtain two views of a long box-spread.

  • A long box-spread can be viewed as a long synthetic stock at a price plus a short synthetic stock at a higher price .
  • A long box-spread can be viewed as a long bull call spread at one pair of strike prices, and , plus a long bear put spread at the same pair of strike prices.

We can obtain a third view of the long box-option by reading the table diagonally. In order to interpret the diagonals, we need to introduce the straddle, which is a combination of a long call and a long put both at a strike price equal to the current stock price (at-the-money). This combination is direction neutral, its terminal payoff being dependent not on the direction of movement of the stock price but only on the magnitude of the movement. The band between the break-even points can be extended by separating the strike prices of the two options symmetrically with respect to the current stock price:

  • If both options are in-the-money, the combination is called a long gut.
  • If both options out-of-the-money, the combination is called a long strangle.

Returning to the long box-spread, we see that the leading diagonal is a long gut combination, and the other diagonal is a short strangle combination. Hence a long box-spread may be created as a coupling of a long gut with a short strangle.

The short box-spread can be treated similarly.

An Example[edit]

As an example, consider a three-month option on a stock whose current price is $100. If the interest rate is 8% pa and the volatility is 30% pa then the prices for the options might be:

Call Put
$13.10 $ 1.65
$3.05 $10.90

The initial investment for a long box-spread would be $19.30. The following table displays the payoffs of the 4 options for the three ranges of values for the terminal stock price :

The terminal payoff has a value of $20 independent of the terminal value of the share price. The discounted value of the payoff is $19.60. Hence there is a nominal profit of 30 cents to be had by investing in the long box-spread.

Prevalence[edit]

To what extent are the various instruments introduced above traded on exchanges? Chaput and Ederington, surveyed Chicago Mercantile Exchange's market for options on Eurodollar futures. For the year 1999-2000 they found that some 25% of the trading volume was in outright options, 25% in straddles and vertical spreads (call-spreads and put-spreads), and about 5% in strangles. Guts constituted only about 0.1%, and box-spreads even less (about 0.01%). [Ratio spreads took more than 15%, and about a dozen other instruments took the remaining 30%.This is considered typically to be a "Market Maker/Floor trader" strategy only, due to extreme commission costs of the multiple leg spread. If the box is for example 20 dollars as per lower example getting short the box anything under 20 is profit and long anything over, has hedged all risk.]

References[edit]

  • Ben-Zion Uri., Danan Shmuel and Yagil Joseph, “Box Spread Strategies and Arbitrage Opportunities”, The Journal of Derivatives, Spring 2005, 47-62.
  • Bharadwaj, Anu and James B. Wiggins, Box spread and put-call parity tests for the S&P 500 index LEAPS market, Journal of Derivatives, 8(4) (2001): 62-71. The box-spread reveals an arbitrage profit insufficient to cover transaction costs.
  • Billingsley, R.S. and Don M. Chance, Options market efficiency and the box spread strategy, Financial Review, 20 (1987): 287-301.
  • Chance, Don M, An Introduction to Derivatives, 5th edition, Thomson, 2001.
  • Chaput, J. Scott and Louis H. Ederington, Option spread and combination trading, [1][permanent dead link], 2002.
  • Hemler, Michael L.and Thomas W. Miller, Jr. Box spread arbitrage profits following the 1987 market crash: real or illusory?, Journal of Financial and Quantitative Analysis, 32(1)(1997): 71-90. Post-market simulations with box-spreads on the S&P 500 Index show that market ineffiency increased after the 1987 crash.
  • Hull, John C., Fundamentals of Futures and Options Markets, 4th edition, Prentice-Hall, 2002.
  • Ronn, Edud and Aimee Gerbarg Ronn, The Box spread arbitrage conditions: theory, tests, and investment strategies, Review of Financial Studies, 2(1) (1989): 91-108. The box-spread is used to test for arbitrage opportunities on Chicago Board Options Exchange data.

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