An Example
As an example, consider a three-month option on a stock whose current price is $100. If the interest rate is 8% pa and the volatility is 30% pa then the prices for the options might be:
| Call | Put | |
|---|---|---|
| $13.10 | $ 1.65 | |
| $ 3.05 | $ 10.90 |
The initial investment for a long box-spread would be $19.30. The following table displays the payoffs of the 4 options for the three ranges of values for the terminal stock price :
The terminal payoff has a value of $ 20 independent of the terminal value of the share price. The discounted value of the payoff is $ 19.60. Hence there is a nominal profit of 30 cents to be had by investing in the long box-spread.
Read more about this topic: Box Spread
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“Our intellect is not the most subtle, the most powerful, the most appropriate, instrument for revealing the truth. It is life that, little by little, example by example, permits us to see that what is most important to our heart, or to our mind, is learned not by reasoning but through other agencies. Then it is that the intellect, observing their superiority, abdicates its control to them upon reasoned grounds and agrees to become their collaborator and lackey.”
—Marcel Proust (1871–1922)