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Box Spread

A box spread is an advanced options trading strategy that involves creating a synthetic long and short position simultaneously using both call and put options. The strategy combines buying and selling both a call and a put option at different strike prices, with the same expiration date, on the same underlying asset. A box spread typically results in a risk-free position where the profit is the difference between the strike prices minus the net cost of entering the position.

Example

An investor might execute a box spread by buying a 100-strike call and a 100-strike put while simultaneously selling a 110-strike call and a 110-strike put. If the options are priced correctly, the difference between the strike prices (in this case, $10) minus the net cost of setting up the spread would represent a risk-free profit.

Key points

• A box spread is an arbitrage strategy using both call and put options.

• It involves creating synthetic long and short positions simultaneously.

• Typically results in a risk-free profit if executed correctly.

Quick Answers to Curious Questions

The primary purpose is to exploit arbitrage opportunities by locking in a risk-free profit when the options are mispriced.

No, it is a complex strategy typically used by advanced traders or institutional investors familiar with options trading and arbitrage opportunities.

By creating offsetting positions with different strike prices, the spread captures the difference in strike prices as a profit, minus the cost of entering the position.