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:
“Sweet spring, full of sweet days and roses,
A box where sweets compacted lie;
My music shows ye have your closes,
And all must die.”
—George Herbert (1593–1633)
“When I married Humphrey I made up my mind to like sermons, and I set out by liking the end very much. That soon spread to the middle and the beginning, because I couldn’t have the end without them.”
—George Eliot [Mary Ann (or Marian)