Box Spread Strategy

Question

Box Spread Strategy

An Option arbitrage strategy used when the underlying is under priced.

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Answer 1 · 2018-05-30

The box spread, also called long box, is a popular option arbitrage strategy. The strategy is used when the underlying is underpriced in comparison to their options. It involves buying a bull call spread and a bear put spread with same strike prices and expiration dates. The box spread is executed by Buying 1 ITM Call, Selling 1 OTM Call, Buying 1 ITM Put and Selling 1 OTM Put of the same expiration dates.

The box spread is a riskless profit strategy wherein you can eliminate risk and earn a small profit from the spread.

Example

Suppose SBI is trading at Rs 300 in April. You believe it is underpriced in relation to its options. To execute box spread, you can-

Buy APR 250 PUT
Sell APR 350 PUT
Buy APR 250 CALL
Sell APR 350 CALL

Box Spread Strategy

Example

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