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Box Spread
A box spread is an options arbitrage strategy that combines buying a bull call spread with a matching bear put spread. It is commonly called a long box strategy. These vertical spreads must have the same strike prices and expiration dates.
Key Takeaways
 A box spread is an options arbitrage strategy that combines buying a bull call spread with a matching bear put spread.
 A box spread’s payoff is always going to be the difference between the two strike prices.
 The cost to implement a box spread, specifically the commissions charged, can be a significant factor in its potential profitability.
Understanding Box Spread
A box spread (long box) is optimally used when the spreads themselves are underpriced with respect to their expiration values. When the trader believes the spreads are overpriced, he or she may employ a short box, which uses the opposite options pairs. The concept of a box comes to light when one considers the purpose of the two vertical, bull call and bear put, spreads involved.
A bullish vertical spread maximizes its profit when the underlying asset closes at the higher strike price at expiration. The bearish vertical spread maximizes its profit when the underlying asset closes at the lower strike price at expiration. By combining both a bull call spread and a bear put spread, the trader eliminates the unknown, namely where the underlying asset closes at expiration. This is so because the payoff is always going to be the difference between the two strike prices at expiration.
If the cost of the spread, after commissions, is less than the difference between the two strike prices, then the trader locks in a riskless profit, making it a deltaneutral strategy. Otherwise, the trader has realized a loss comprised solely of the cost to execute this strategy.
Building a Box Spread
To construct a box spread, a trader buys an inthemoney (ITM) call, sells an outofthemoney (OTM) call, buys an ITM put and sells an OTM put. In other words, buy an ITM call and put and then sell an OTM call and put.
Given that there are four options in this combination, the cost to implement this strategy, specifically the commissions charged, can be a significant factor in its potential profitability. Complex option strategies, such as these, are sometimes referred to as alligator spreads.
Example of a Box Spread
Intel stock trades for $51.00. Each options contract in the four legs of the box controls 100 shares of stock. The plan is to:
 Buy the 49 call for 3.29 (ITM) for $329 debit per options contract
 Sell the 53 call for 1.23 (OTM) for $123 credit
 Buy the 53 put for 2.69 (ITM) for $269 debit
 Sell the 49 put for 0.97 (OTM) for $97 credit
The total cost of the trade before commissions would be $329 – $123 + $269 – $97 = $378. The spread between the strike prices is 53 – 49 = 4. Multiply by 100 shares per contract = $400 for the box spread.
In this case, the trade can lock in a profit of $22 before commissions. The commission cost for all four legs of the deal must be less than $22 to make this profitable. That is a razorthin margin, and this is only when the net cost of the box is less than the expiration value of the spreads, or the difference between the strikes.
There will be times when the box costs more than the spread between the strikes so the long box would not work. However, a short box might. This strategy reverses the plan and sells the ITM options and buys the OTM options.
Box Spread (Arbitrage) Options Trading Strategy Explained
Published on Thursday, April 19, 2020  Modified on Sunday, July 21, 2020

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Box Spread (Arbitrage) Options Strategy
Strategy Level  Advance 
Instruments Traded  Call + Put 
Number of Positions  4 
Market View  Neutral 
Risk Profile  None 
Reward Profile  Limited 
Breakeven Point 
Box Spread (also known as Long Box) is an arbitrage strategy. It involves buying a Bull Call Spread (1 ITM and I OTM Call) together with the corresponding Bear Put Spread (1 ITM and 1 OTM Put), with both spreads having the same strike prices and expiration dates.
The strategy is called Box Spread as it is combination of 2 spreads (4 trades) and the profit/loss calculated together as 1 trade. Note that the total cost of the box remain same irrespective to the price movement of underlying security in any direction. The expiration value of the box spread is actually the difference between the strike prices of the options involved.
The Long Box strategy is opposite to Short Box strategy. It is used when the spreads are underpriced with respect to their combined expiration value.
The usual box spread look like as below for NIFTY current index value as 10550 (NIFTY Spot Price):
Box Spread OrdersOrders  NIFTY Strike Price  

Bull Call Spread  Buy 1 ITM Call  NIFTY18APR10400CE 
Sell 1 OTM Call  NIFTY18APR10700CE  
Bear Put Spread  Buy 1 ITM Put  NIFTY18APR10700PE 
Sell 1 OTM Put  NIFTY18APR10400PE 
 Call Spread meaning 2 calls, one ITM and one OTM.
 Put Spread meaning 2 puts, one ITM and one OTM.
 ITM is ‘In the money’ and OTM is ‘Out of the money’. For Nifty Spot Price at 10550, the 10400 Call Option is ITM and 10700 Call is OTM.
 Arbitrage strategy is a way to earn small profits with very little or zero risk. In this a trader buys the call and put have the same strike value and expiration The resulting portfolio is delta neutral.
As you see in the above table, this is a delta neutral strategy. The trader is buying and selling equivalent spreads. As long as the price paid for the box is significantly below the combined expiration value of the spreads, a riskless profit can be earned. We will discuss this in detail in an example below.
As the profit from the box spread is very small, the brokerage and taxes involved in this strategy can sometimes offset all of the gains. It’s very important to consider the trading cost (brokerage, fee, taxes etc.) before trading in this strategy.
When to use Box Spread (Arbitrage) strategy?
Being risks free arbitrage strategy, this strategy can earn better return than earnings in interest from fixed deposits. The earning from this strategy varies with the strike price chosen by the trader. i.e. Earning from strike price ‘10400, 10700’ will be different from strike price combination of ‘9800,11000’.
The long box strategy should be used when the component spreads are underpriced in relation to their expiration values. In most cases, the trader has to hold the position till expiry to gain the benefits of the price difference.
Note: If the spreads are overprices, another strategy named Short Box can be used for a profit.
This strategy should be used by advanced traders as the gains are minimal. The brokerage payable when implementing this strategy can take away all the profits. This strategy should only be implemented when the fees paid are lower than the expected profit.
Example
Box Spread Example 1
Let’s take a simple example of a stock trading at в‚№45 (spot price) in June. The option contracts for this stock are available at the following premium:
 July 40 call – в‚№6
 July 50 call – в‚№1
 July 40 put – в‚№1.50
 July 50 put – в‚№6
Lot size: 100 shares in 1 lot
Buy a Bull Call Spread = Buy ‘July 40 call’ + Sell ‘July 50 call’
Bull Call Spread Cost = (в‚№6*100) – (в‚№1*100) = в‚№500
Buy Bear Put Spread = Buy ‘July 50 put’ + Sell ‘July 40 put’
Bear Put Spread Cost = (в‚№6*100) – (в‚№1.50*100) = в‚№450
The total cost of the box spread is: в‚№500 + в‚№450 = в‚№950
The expiration value of the box is computed to be: (в‚№50 – в‚№40) x 100 = в‚№1000
Since the box spread value is lower, the Long Box strategy can be used hear for risk free profits.
Profit: в‚№1000 – в‚№950 = в‚№50
Net Profit = в‚№50 – Brokerage – Taxes
In above example, since the total cost of the box spread is less than its expiration value, a riskfree arbitrage is possible with the long box strategy. Now let’s discuss about the possible scenarios:
Scenario 1: Stock price remain unchanged at в‚№45
The July 40 put and the July 50 call expire worthless while both the July 40 call and the July 50 put expires inthemoney with в‚№500 intrinsic value each. So the total value of the box at expiration is: в‚№500 + в‚№500 = в‚№1000.
Scenario 2: Stock price reaches to в‚№50
Only the July 40 call expires inthemoney with в‚№1000 in intrinsic value. So the box is still worth в‚№1000 at expiration.
Scenario 3: Stock price falls to в‚№40
A similar situation as scenario 2 happens but this time it is the July 50 put that expires inthemoney with в‚№1000 in intrinsic value while all the other options expire worthless. Still, the box is worth в‚№1000.
In all the possible scenarios, the box worth remains at в‚№1000 on expiry resulting in profit of в‚№50.
Box Spread Example 2
Let’s take an example of NIFTY Options which is traded in lot size of 75.
Box Spread Example for NIFTY OptionsStrike Price  Premium (в‚№)  Premium Paid (в‚№) (Premium * Lot Size of 75) 

Bull Call Spread  Buy 1 ITM Call  10400  187.70  14077.50 
Sell 1 OTM Call  10700  14.00  1050.00  
Bear Put Spread  Buy 1 ITM Put  10700  145.55  10916.25 
Sell 1 OTM Put  10400  24.95  1871.25  
Total  22072.50 
Bull Call Spread Cost  =(14077.501050.00)  13027.50 
Bear Put Spread Cost  =(10916.251871.25)  9045.00 
Total Box Spread Cost  22072.50  
Expiration value of the box  =(1070010400)*75  22500 
Profit  =(2250022072.50)  427.5 
Brokerage + Taxes  =8 trades * в‚№20 + taxes  в‚№200 
Net Profit  в‚№227.5 (1.03%) 
Note the Net Profit changes when you buy options at different the strike price using the same strategy.
Market View – Neutral
The market view for this strategy is neutral. The movement in underlying security doesn’t affect the outcome (profit/loss). This arbitrage strategy is to earn small profits irrespective of the market movements in any direction.
Actions
 Buy Call Option 1
 Sell Call Option 2
 Buy Put Option 1
 Sell Put Option 2 (2>1)
Say for XYZ stock, the component spreads are underpriced in relation to their expiration values. The trader could execute Long Box strategy by buying 1 ITM Call and 1 ITM Put while selling 1 OTM Call and 1 OTM Put. There is no risk of loss while the profit potential would be the difference between two strike prices minus net premium.
Risk Profile of Box Spread (Arbitrage)
The Box Spread Options Strategy is a relatively riskfree strategy. There is no risk in the overall position because the losses in one spread will be neutralized by the gains in the other spread.
The trades are also riskfree as they are executed on an exchange and therefore cleared and guaranteed by the exchange.
The small risks of this strategy include:
 The cost of trading – Some brokers charges high brokerage/fees, which along with the taxes could make the overall lossmaking trade.
 The box spread can be liquidated by an offsetting transaction easily and transparently on an exchange with minimal loss/profit.
Reward Profile of Box Spread (Arbitrage)
Limited
The reward in this strategy is the difference between the total cost of the box spread and its expiration value. Being an arbitrage strategy, the profits are very small.
It’s an extremely lowrisk options trading strategy.
What Is A Box Spread?
Expertise: Investment Banking  Private Equity
A ‘box spread’ is a trading term used for hedging when trading . It requires buying and selling highly correlated assets in the correct ratios to each other. An example of a box would be going long in the front month, short in the 2nd month, long in the 3rd month, and short again in the furthest month in the ratio of +1, 3, +3, 1.
For example, to set up a box spread for WTI Oil Futures for January to April the strategy would be as follows:
 January – Buy 1 unit
 February – Sell 3 units
 March – Buy 3 units
 April – Sell 1 unit
The idea behind using such a strategy is that it is deemed to be almost riskless. As the products involved in the spread are very highly correlated, any movement in one will be offset by another, therefore hedging all your risk. The profit is made by one asset moving slightly more in the correct direction than the others.
A box spread usually has very low returns, but very low risk and can be an example of overhedging.

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