How to decide on the proper strike and expiry month while opening a long box spread

V

Victor123

In theory, I should be able to open up a long box by selecting two strikes where the debit required is less than the difference between the strikes, then hold the box to expiration and get back an amount equal to the difference of the strikes.

But ,are there any guidelines on which strikes to select/ Should they both be ITM,OTM or should the strikes basically be equidistant from the money?
Also, is it fair to say that we should choose a nearer expiry because the profits are realized only at expiry , so a further expiry date will delay the realised profits?
 
How often do you expect to be able to do this at a discount? I don't see this trade available often without legging and have risk.
 
Yes, legging will be required. Let us say I enter the bull call spread first...and if the stock rallies, enter the bear put spread leg. So in this case, how do I go about initially selecting the legs of the bull call spread? Both ITM, both OTM, or one ITM, other OTM?
Thank you.
 
You are far better off simply selling out of the call spread then turning it into a box by buying a put spread. If you turn it into a box you will have additional risk (pin risk at expiration) and costs (exercise/assignment) at expiration.
 
I hope this is still on topic.
First - FSU - how is there a risk of assignment on a box spread? Anything ITM should cancel out by definition of a box spread, no?

My main question - the market regularly offers a box spread on SPY options about a month out (and more) with a $10 spread. Right now (8/18/15) 9/18 options offers a box spread 205/215 for bid/ask 10.64/10.44. Worst case this is $44 - commission. Why does this trade exist? Shouldn't the algos rectify it automatically?

What am I missing?
 
newwurldmn said:
Early exercisability on the 205 calls.
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You mean the possibility of getting assigned - which also applies to the 215 puts, I would imagine. But that would not be an expiration risk for box spread, because the assignments would cancel out. So it would only be a risk if the call option went to no time value, right?
 
The risk of being long or short a box in the SPY would include pin risk at expiration. Here if the index settles around a strike that you are short, there is a possibility that you may not be assigned even if the option is slightly in the money. This would leave you with a potential stock position.

There is also the issue of dividends in the SPY. Depending on where the index goes, you may be assigned early on your short calls if they are deep in the money enough before the dividend. You may also need to exercise your long calls to capture the dividend.

Trading boxes in other equities you would have potential early assignments in hard to borrow stocks. You would also have potential risks in takeover stocks.

To deliberately try an put on a box for a profit is difficult, mainly due to the commissions you will have to overcome on four sides and potentially 8 sides to take it off if you don't want to have the above risks.
 
misterkel said:
You mean the possibility of getting assigned - which also applies to the 215 puts, I would imagine. But that would not be an expiration risk for box spread, because the assignments would cancel out. So it would only be a risk if the call option went to no time value, right?
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No. Only the 205 call is affected by the dividend. You don't early exercise puts unless the funding rate makes sense (which in this environment doesn't and the option pricing reflects that).

The 215 combo compensates you for not receiving the dividend. However the 205 combo doesn't compensate you for the dividend because you can exercise the calls to receive the dividend.

If the options were European, the price would be $10.
 
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