what is a box spread 
a box spread or long box is an options arbitrage strategy that combines buying a bull call spread with a matching bear put spread a box spread can be thought of as two vertical spreads that each has the same strike prices and expiration dates box spreads are used for borrowing or lending at implied rates that are more favorable than a trader going to their prime broker clearing firm or bank because the price of a box at its expiration will always be the distance between the strikes involved e g a 100 pt box might utilize the 25 and 125 strikes and would be worth 100 at expiration the price paid for today can be thought of as that of a zero coupon bond the lower the initial cost of the box the higher its implied interest rate this concept is known as a synthetic loan understanding a box spreada box spread is optimally used when the spreads themselves are underpriced with respect to their expiration values when the trader believes the spreads are overpriced they may employ a short box which uses the opposite options pairs instead the concept of a box comes to light when one considers the purpose of the two vertical bull call and bear put spreads involved a bullish vertical spread maximizes its profit when the underlying asset closes at the higher strike price at expiration the bearish vertical spread maximizes its profit when the underlying asset closes at the lower strike price at expiration by combining both a bull call spread and a bear put spread the trader eliminates the unknown namely where the underlying asset closes at expiration this is so because the payoff is always going to be the difference between the two strike prices at expiration if the cost of the spread after commissions is less than the difference between the two strike prices then the trader locks in a riskless profit making it a delta neutral strategy otherwise the trader has realized a loss comprised solely of the cost to execute this strategy box spreads effectively establish synthetic loans like a zero coupon bond they are initially bought at a discount and the price steadily rises over time until expiration where it equals the distance between strikes box spread constructionbve hsp lsp mp bve npp commissions ml npp commissions where bve box value at expiration hsp higher strike price lsp lower strike price mp max profit npp net premium paid ml max loss begin aligned text bve text hsp text lsp text mp text bve text npp text commissions text ml text npp text commissions textbf where text bve text box value at expiration text hsp text higher strike price text lsp text lower strike price text mp text max profit text npp text net premium paid text ml text max loss end aligned bve hsp lspmp bve npp commissions ml npp commissionswhere bve box value at expirationhsp higher strike pricelsp lower strike pricemp max profitnpp net premium paidml max loss to construct a box spread a trader buys an in the money itm call sells an out of the money otm call buys an itm put and sells an otm put in other words buy an itm call and put and then sell an otm call and put given that there are four options in this combination the cost to implement this strategy specifically the commissions charged can be a significant factor in its potential profitability complex option strategies such as these are sometimes referred to as alligator spreads there will be times when the box costs more than the spread between the strikes should this be the case the long box would not work but a short box might this strategy reverses the plan selling the itm options and buying the otm options box spread examplecompany a stock trades for 51 00 each options contract in the four legs of the box controls 100 shares of stock the plan is to the total cost of the trade before commissions would be 329 123 269 97 378 the spread between the strike prices is 53 49 4 multiply by 100 shares per contract 400 for the box spread in this case the trade can lock in a profit of 22 before commissions the commission cost for all four legs of the deal must be less than 22 to make this profitable that is a razor thin margin and this is only when the net cost of the box is less than the expiration value of the spreads or the difference between the strikes hidden risks in box spreadswhile box spreads are commonly used for cash management and are seen as a way to arbitrage interest rates with low risk there are some hidden risks the first is that interest rates may move strongly against you causing losses like they would on any other fixed income investments that are sensitive to rates a second potential danger which is perhaps less obvious is the risk of early exercise american style options such as those options listed on most u s stocks may be exercised early i e before expiration and so it is possible that a short option that becomes deep in the money can be assigned in the normal construction of a box this is unlikely since you would own the deep call and put but the stock price can move significantly and then find yourself in a situation where you might be assigned this risk increases for short boxes written on single stock options as was the infamous case of a robinhood trader who lost more than 2 000 on a short box when the deep puts that were sold were subsequently assigned causing robinhood to exercise the long calls in an effort to come up with the shares needed to satisfy the assignment this debacle was posted online including on various subreddits where it has become a cautionary tale especially after said trader boasted that it was a virtually riskless strategy the lesson here is to avoid short boxes or to only write short boxes on indexes or similar that instead use european options which do not allow for early exercise frequently asked questionsa box strategy is best suited for taking advantage of more favorable implied interest rates than can be obtained through usual credit channels e g a bank it is therefore most often used for purposes of cash management a long box is in theory a low risk strategy that is sensitive primarily to interest rates a long box will always expire at a value worth the distance between the two strike prices utilized a short box however may be subject to early assignment risk when using american options a short box in contrast to a standard long box involves selling deep itm calls and puts and buying otm ones this would be done if the price of the box is trading at higher than the distance between strikes which can be caused for several reasons including a low interest rate environment or pending dividend payments for single stock options 