Box Spread
Categories: Derivatives, Trading
A Box Spread is also known as a Long Box. It's a strategy of buying shares in pairs of bull call spreads and bear put spreads.
A spread (not the kind you use to flavor your slice of sourdough) is the difference between the bid and the asking price. The bull call strategy is used when a moderate rise in assets is expected. To do this, the investor buys stocks at a specific price and writes calls on the same assets at a higher price (basically buying the share and preparing to sell directly afterward for a profit).
The bear put strategy is the opposite: the investor buys expecting a loss.
These purchases will have the same strike price and the same expiration date. By pairing the shares up this way, the payoff will be the difference between the two strike prices. This is done when the investor believes the shares are underpriced. The opposite pairs would use the short box strategy.
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finance a la shmoop what is a derivative? well it's derived it's a something taken
from something else like a derivative of hot weather is thirst a derivative of [Girl takes sip of glass of water on a beach]
hunger is well you know crankiness that's diva thing you get there...
derivative of a 1/32 quarterback rating in the NFL is like serious wealth yeah
yeah discount double shmoop yeah look for it be on there with aaron
and a derivative of a stock or bond or other security is a something which
derives its value based on the performance of that underlying security
there are basically two flavors of derivative put options ie the right to [Ice cream flavors appear]
sell a security at a given price over a given time period and a call option, ie
right to buy a security at a given price over a given time period
well the price of that option is derived from the price of the security and a few
other factors like strike prices and duration and all that stuff
colonel electric the downgraded new version of General Electric is trading [Colonel Electric appears in a suit]
for 25 bucks a share a derivative of its share price is sold in the form of a
call option with a $30 strike price expiring about 90 days from now on the
third Friday of the end of that month well investors pay a price albeit
probably a small one for the right to then pay 30 bucks a share for colonel [Call option appears for colonel electric]
electric at any time in the next 90 ish days until that option expires making the bet
that the stock will go well above 30 bucks a share in that time period that
call option is thus a derivative of the colonel electric primary stock price got
it if you really want to get personal well here's the ultimate form of
derivative [Baby laying down]