box spreads

daniel5198 · Jan 27, 2008

Quote from stevenao:

I am another newbie. Can someone explain where selling a put below the current stock price will trigger an early assignment and carry a cost before the expiration date?

just imagine for a second you were the put buyer. now what would you do? there you go.

stevenao · Jan 27, 2008

I got it now. It is about the early exercise policy in America Style options.

http://en.wikipedia.org/wiki/Exercise_(options)

Thanks.

stevenao · Jan 27, 2008

Looking at TWS platform from IB, there is a Box Spread combo composer there. Now, I really wonder why they have that combo. I want to find out if it is possible to make a profit doing box spreads with them. They do have low commission fees and current interest is low.

MTE · Jan 27, 2008

Quote from stevenao:

Looking at TWS platform from IB, there is a Box Spread combo composer there. Now, I really wonder why they have that combo. I want to find out if it is possible to make a profit doing box spreads with them. They do have low commission fees and current interest is low.

No, it's not possible to make money with boxes as they are arbitrage positions and as a retail trader you won't be able to do that - too slow and the costs are too high.

With a box spread you are essentially lending to or borrowing money from the market.

stevenao · Jan 28, 2008

I got the idea now. It needs to be done on European style options. However, the arbitrage is usually very little. It is almost impossible to capture it without reasonable fast eyes and hands.

MTE · Jan 28, 2008

Quote from stevenao:

I got the idea now. It needs to be done on European style options. However, the arbitrage is usually very little. It is almost impossible to capture it without reasonable fast eyes and hands.

Box can be done on american style as well. The early exercise is an issue with ITM options not OTM!

It's not almost impossible to caputre, it is impossible to capture cause by the time it gets to your retail platform it is already too late, let alone seeing and acting on it!

dipper17 · Jan 28, 2008

MTE has wrapped it up correctly. Doing a box, if you can get it on for fair value ( fair value in this case is no mystery ) is simply lending or borrowing money from the market.

El OchoCinco · Jan 28, 2008

Quote from dipper17:

MTE has wrapped it up correctly. Doing a box, if you can get it on for fair value ( fair value in this case is no mystery ) is simply lending or borrowing money from the market.

Is it really borrowing though because most brokers will not let you have access to the net credit received and it will be locked up with margin. So if you do it you are not really "borrowing", just making your broker money...

dipper17 · Jan 28, 2008

You're doing both in reality. Some bigger firms will sell the BOX to raise short term capital in a big jam.

MTE · Jan 28, 2008

Quote from optioncoach:

Is it really borrowing though because most brokers will not let you have access to the net credit received and it will be locked up with margin. So if you do it you are not really "borrowing", just making your broker money...

Well, my comment wasn't really meant for the retail trader, who can't use the box in this way, but in general for the big guys who can and do use it this way.