What is a Box Spread?
The box spread is a strategy that comes into play in the practice of options trading. The idea behind a box spread is to create a situation in which there is zero risk in regard to the payoff of the actions taken in the strategy. This essentially involves creating a chain of events that results in a no arbitrage assumption. The total of the net premium used in the acquisition process is to be equal to the present value of the payoff on the transaction. Box spreads make use of a series of puts and calls to obtain the desired result. Within the context of this strategy, the investor may choose to follow a bull spread with a bear spread in order to create the desired balance between premium and payoff. The bull spread may involve a long call option coupled with a short call option that is then followed by a bear spread that involves a long put option and a short put option. This series of transactions, when diagrammed, can easily be demonstrated in the form of a rectangular box, resulting