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). 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; and its name derives from the fact that the prices for these options form a rectangular box in two columns of a quotation.
Note that box spreads also form a strategy in futures trading - see below.
Read more about Box Spread: Background, The Box Spread, An Example, Prevalence, The Box Spread in Futures
Famous quotes containing the words box and/or spread:
“The idea that you can merchandise candidates for high office like breakfast cereal—that you can gather votes like box tops—is, I think, the ultimate indignity to the democratic process.”
—Adlai Stevenson (1900–1965)
“But all he did was spread the room
Of our enacting out the doom
Of being in each other’s way,
And so put off the weary day
When we would have to put our mind
On how to crowd but still be kind.”
—Robert Frost (1874–1963)