Box Spread

[Herkfsu]

Hi all,

Assuming flat IV and no market frictions the buying the below basket of options should give me a $10 credit, expiring at $10, correct?


Short $100 Put
Long $90 Put
Short $90 Call
Long $100 Call

And I assume buying it for -$11 would be a guaranteed $1 profit?

Thanks!

 

[spindr0]

Buying the box for - $11 would be a guaranteed loss.
You need to sell it + $11 for a guaranteed $1 profit.

 

[Herkfsu]

Well buying it for -$11, meaning you get an $11 credit. If it will expire at $10, how is this not a guaranteed $1 profit?

 

[Herkfsu]

I should say it would expire at -10(you are short higher put and lower call). If you are buying at -11 and it moves to -10 at expiry, its a guaranteed $1 profit.

 

[Herkfsu]

Buying at -11(Adjusted IVs)

At expiry, $100 profit

 

[spindr0]

I should say it would expire at -10 (you are short higher put and lower call). If you are buying at -11 and it moves to -10 at expiry, its a guaranteed $1 profit.

A -11 and a -10 does not add up to +1

A long Box Spread involves buying a bull call spread and buying a bear put spread. Buying something results in a debit. A debit has a minus sign in front of it.

You have presented a short Box spread which is selling the two spreads. That results in a credit which has a plus sign in front of it.

If you STO for +$11 and BTC for -$10 then you gross $1.

 

[Herkfsu]

Thanks.

My point is if you are long something at -11 and it goes to -10, you gained 1.

On my platform it does not indicate that this is a short box. If I put on a bull put spread and bear call spread in one trade(what I laid out above), it simply says this is a box.

If I SOLD a bear put spread and bull call spread then you would want to sell at all 11. If I BOUGHT a bull put spread and a bear call spread, I would want to buy at -11. Seems like 50 cents vs half a dollar, no?

 

[Robert Morse]

Herkfsu,

I don't think spindr0 is picking on you when he corrects you. With options is is important to learn the language of the product. If you buy a box spread, you buy the vertical call and put spread. If you sell the box spread, you do the other side.
If you buy any 10 point box for less than $10, your profit is the difference between your net buys and the 10 points minus any expenses and interest. If you sell a 10 point box for more than $10, your profit is the difference between that credit and the $10 you get at expiration, if you get to keep that to expiration. If this is not a cash settled index, and the spread is trading over $10, there are a number of situations where you can lose money from early assignment of the ITM put or call.

Bob

 

[Herkfsu]

Thanks Robert

I am pretty sure we are saying the same thing, I am just not using the right terms.

 

[Robert Morse]

I am pretty sure we are saying the same thing, I am just not using the right terms.

Correct. My point is that it is important to learn them, especially with options and particularly when you are asking for help. I assume this is just a general question as trading box spreads today is near impossible unless you are a market maker.