What is a box spread?

Generally speaking, there is no reason to trade box spreads 

A box spread is a 4-leg option strategy with two strikes. A long box spread consists of a debit call spread, and a debit put spread with the same strikes. A short box spread includes of a credit call spread, and a credit put spread with the same strikes.

In theory, a box spread should always be worth the width of the strikes. This is because:

  • If the stock price is outside of the strikes at expiration, the in-the-money spread will be a full value and out-of-the-money spread will be worthless. 
  • If the stock price is in between the strikes at expiration, the in-the-money amounts of each of the in-the-money options will add up to the width of the spread.

In the best-case scenario, you will pay slightly more than the width (when buying) or slightly less than the width (when selling) due to market making incentives and slippage… and that’s not even considering commissions and fees.

What looks like a "free money" trade, in reality, is not

An even more dangerous aspect of box spreads is that you can sometimes sell them for more than the width. This gives the illusion of risk-free profits, but there are almost always “hidden risks” which can result in losing much more than your initial investment in this situation. To learn more about the potential risks of box spreads, please click here.

Below is an example of a 10-lot DIA box spread marking above the $10 spread width by $0.20. At first glance, it appears to be a $200 risk-less profit, but given the inherent risks of a box spread it could potentially yield negative results.