a quick options strategy that involves purchasing both a bull call spread (two call options ranging a lower strike price and a higher strike price) with a compatible bear put spread (purchase and sale of puts at similar underlying asset and expiration date but using varied strike price).
How a Box Option Works
A box option, often referred to as a long box or box spread strategy, is a quick options strategy that involves purchasing both a bull call spread and a compatible bear put spread. A box option can be a vertical option, but it is only similar to a vertical option if they both possess similar strike prices and due dates. In a box options strategy, the most important aspects are the bull call spread, bear put spread, high strike price, low strike price, and due dates. All these four factors, in one way or the other, determine if the box options strategy will fetch you huge profits with fewer risks and losses in the future.
Whenever an investor trader thinks that the spreads are overpriced, he or she may make use of a short box that uses the opposite options pairs (combining a long position with a short position in two closely related stocks). Think of the idea of a box as the double vertical options (trading two vertical bullish options that have the same due date), the bull call, and the corresponding bear put, and these options comprise the box option. A vertical bullish option (purchasing a lower strike option and selling the one with a higher strike) only maximizes its profit when the original stock sells at the higher strike price at a due date. On the other hand, the vertical bearish option (buying a put call and selling another put call at a lower strike price in the same due date) only maximizes its profit in a situation where the original stock sells at the lower strike price at a due date.
Before an investor can create a box option, he or she must purchase an in-the-money (ITM) call (when the current market price of the original stock is more than the call option strike price), sell an out-of-the-money (OTM) call (when the original stock is trading at a price that is below the call option strike price), purchase an ITM put, and sell an OTM put.
Example of a Box Option
Let's say, for example, the company Andy & Stuffs sells each asset for $51. Each options strategy in the four aspects of the box option assigns 100 shares of assets. The major target is to:
- Purchase the 49 calls for 3.29 (ITM) at $329 debit for each options strategy and sell the 53 calls for 1.23 (OTM) at $123 credit for each options strategy.
- Purchase the 53 put for 2.69 (ITM) at $269 debit for each options strategy and sell the 49 put for 0.97 (OTM) at $97 credit for each options strategy.
- Have the sum of the final costs of the trade before extra costs charged be $329 - $123 + $269 - $97 = $378. The options between the high strike prices and the low strike prices should be 53 - 49 = 4.
- Times the result by 100 shares for each strategy option = $400 for the box option.
When this happens, the transaction can secure a profit of $22 before they charge extra costs. The extra costs charged for all four options strategy of the box option must be less than $22 for the option strategy to be profitable. This is a very small difference, and it only occurs when the net worth of the box option is less than the due date of the strategy options or the difference between the high strike price and the low strike price.
Sometimes, the cost of the box option may be worth more than the difference between the high strike price and the lower strike price. When this happens, the long box option may not function, but the short box might. However, when this happens, the strategy has to reverse the target, which will cause you to sell the ITM options and purchase the OTM options.
Significance of a Box Option
A box option is primarily in use when all the main options are underpriced according to their due dates. Using both a bull call option and a bear put option, the investor cancels where the original stock sells at expiration which is always unknown. The profit will pose as the difference between the high strike price and the low strike price at a due date at all times.
Suppose the cost or worth of the option is less than the difference between the high strike price and the low strike price at a due date. In that case, it means the investor is about to get a huge profit without risks, making it look like an option strategy that promises profit for the investor at all times and in all market situations. On the other hand, if the price or worth of the option is more than the difference between the high strike price and the low strike price at a due date, it means the investor has experienced a loss. However, this loss only includes the amount of money the investor used to carry out this option strategy, but it is usually a minimal blow.