box spread

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Box spread

This strategy refers to a type of option arbitrage in which both a bull spread and a bear spread are implemented for an almost-riskless position. One spread is implemented using put options and the other is implemented with calls. The spreads may both be debit spreads (call bull spread vs. put bear spread) or both credit spreads (call bear spread vs. put bull spread).

Box Spread

An option strategy in which one holds both a bull spread and a bear spread. A bull spread is a series of options (either calls or puts, but not both) structured so that one makes a profit if the price of the underlying asset increases, while a bear spread is a similar series designed to do well if the price declines. A box spread therefore reduces or eliminates the risk associated with both a bull spread and a bear spread. Most of the time, it also reduces or eliminates the opportunity for profit, but pricing inefficiencies between the two spreads can lead to profit from arbitrage. A box spread is considered a very complex investment strategy.

box spread

A combination of four options consisting of one money spread on calls (one long, one short, same expiration, different strike price) and one money spread on puts (one long, one short, same expiration, different strike price). A box spread locks in a specific dollar return at expiration (all four options have the same expiration), with the goal being to acquire the position at a sufficiently low outlay that a favorable return is guaranteed.
References in periodicals archive ?
Several more rushes of blood when Almunia went AWOL from his six-yard box spread confusion in an otherwise robust defence.
But Rachubka, advancing to the edge of the box spread himself well to block Hume's low shot.
The box spread is a combination of call and put spreads that matches two pairs of call and put options.
In contrast to the box spread, the call (put) spread combines two call (put) options with identical maturity.
If the box spread, call spread, put spread, call convexity, or put convexity is violated, arbitrage profits are possible by taking appropriate option positions.
Although a violation of any of the inequalities above indicates the presence of an arbitrage opportunity, the box spread inequalities (1a) and (1b) place more demanding restrictions on the pricing of options.
Other tests are based simply on arbitrage arguments and are model-independent, including, for example, the box spread.
Chance (1987) also finds that put-call parity and the box spread are violated frequently for S&P 100 index options and that the violations are significant in size.
In addition, tests of other arbitrage pricing relationships such as the box spread used data for American options (for example, Billingsley and Chance 1985).
On each trading day during the test period, the three pricing relationships discussed above are tested: the box spread (1a) and (1b), call and put spreads (2a) and (2b), and call and put convexity (3a) and (3b).
TABLE 1 Violations and Ex ante Violations of the Box Spread (1a) and (1b)
Note: This table reports the frequency and dollar size of violations of the box spread (1a) and (1b) using daily data for the S&P 500 index and index options from January 1, 1986, through December 31, 1996.