What's in a Box?
A box spread is a complex option position with four legs, combining a Put spread and a Call spread, with two shared strikes and a common expiration.
Professional traders use boxes to make profit on swings in interest rates, dividend plays, or other arbitrage situations. However, there are many other uses which can be highly profitable, with minimum risk.
Example:
Sell AAPL 110 calls, Buy AAPL 115 puts, for net credit -$2.30
Sell AAPL 115 puts, Buy AAPL 110 puts, for net credit -$2.65
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Total Net Credit $4.95
The credit or cost of this AAPL trade would be approximately $5, no matter what expiration. (If the initial credit in excess of $5, the box would reduce in value to $5 at expiration.)
In the Analyzer, Box spreads show up as a straight line, as the amount of profit or loss is independent of stock price.
Short or Long Boxes?
A Box can be created from either Long or Short positions.
Long Box created from Debit Spreads
Short Box created from Credit Spreads
The AAPL example above is a credit/short box. Here is an example of a debit/long box.
Buy GOOGL 1000 Calls for 6.84, sell GOOGL 1010 Call 2.13 net debit 4.71
Buy GOOGL 1010 Puts for 8.05, sell GOOGL 1000 Put 3.30 net debit 4.75
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Total Net Debit 9.46
Where can Boxes be constructed?
Boxes can be constructed ITM, ATM or OTM, depending on the strategy. Here is an example of a box, constructed slightly OTM, when IBM was at $162.91. Notice that the credit is $2.50 and effect on buying power is $0.
What are the margin requirements?
Margin requirements might be significantly different for debit or credit boxes. In general, debit boxes require a significant amount of capital from your account, and credit boxes very little. In some cases, combined credits will exceed the margin requirements, so there may be no net margin. At other times, your brokerage or trading platform may calculate Put and Calls separately and assess margin for each. Always review the trade ticket to discover the margin requirements for your trade.
Pricing and Profit
At expiration, all boxes are worth exactly the distance between the strikes. Consider the natural difference between strikes as your guide. If purchased, this GOOGL box would be worth $10 at expiration, representing $0.54 profit, no matter what the price of GOOGL, and regardless of the date of expiration.
First of all, any $10-wide box will be worth exactly that at expiration--$10, no more, no less--the difference between the strikes. So I can buy a box to open (debit trade) to open for anything under that, I have guaranteed profit. Similarly, if I sell a box to open for more than $10, then the value will drop back to $10, and the difference is guaranteed profit (exceptions include dividend-enriched boxes). We use strategies which capitalize on these changes in value
Secondly, any significant change in market volatility may expand or contract the value of a box. If I sell a box for $9.80, it might quickly be worth $10 if volatility increases, or $9.60 if volatility reduces. However, at expiration the box will still be worth exactly $10. Closing the trade early might result in a loss.
Standard Long Box
- Construct a box with narrow sides, perhaps 1-2% of the stock price.
- Choose ATM or close strikes
- Fill the box with $$$ by buying Put and Call spreads.
TSLA example, current price $354, 50MA at 348
Buy $350 / 347.5 Put Spread for $1.10, closing order for $2.20 credit.
Buy $347.5 / 350 Call Spread for $1.35, closing order for $2.20 credit.
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Net Debit $2.45
- Long boxes purchased at a discount will become worth the full strikes at expiration. e.g. $4.50 will become $5.
- Place closing orders for each side at 80-100%% of potential profit. Close one side of the box (say, Calls) by selling the Debit Spead at maximum profit. Close the other side of the box (say, Puts) by selling the Debit spread at maximum profit. One side will always close near maximum profit.
Standard Short Box
- Construct a box with narrow sides, perhaps 1-2% of the stock price.
- Choose ATM or close strikes
- Fill the box with $$$ by selling Put and Call vertical spreads.
Example:
AMZN current price 1600, 30 day moving average at 1560.
Sell Call spread -1570 /+1580 for $6.10 credit, closing order for $9.75
Sell Put spread -1580/+1570 for $3.75 credit, closing order for $9.00
- Place closing orders for each side at 80-100% of potential profit. Close one side of the box (say, Calls) by buying back the Credit near maximum profit. Close the other side of the box (say, Puts) by buying back the Credit spread for maximum profit. One side will always close near maximum profit.
The trade is over when both Call and Put spreads have been closed for a profit.
Swing Boxes
Traders can make significant profit with Boxes with a stock that swings regularly over a defined range. BKNG, GOOGL and others are good "swinging" stocks. (Investopedia also recommends AAPL, MGM and MSFT).
The Box used can either be Long or Short box, placed near the center of a channel.
- Place the Standard Long or Short Box by choosing narrow strikes in the middle of an identified channel, usually close to the 50 day moving average.
- Choose an expiration that will permit prices to swing above and below the box at least once.
- Fill the Box with either debits or credits (see above).
- Split the Puts and Calls and place closing orders for each at 80-100% profit.
- When the stock price nears the channel edge, close out the highly profitable side and place it for sale (credit) again, for at least 50% of available profit, or place an order to purchase (debit) at a later expiration.. These will not fill until the stock swings toward the other side of the channel.
- The trade is over when both Call and Put spreads have been closed for a profit.
- Repeat, adjusting strikes, expirations and potential credits.
EXAMPLE: A BOX box
Let’s imagine a stock you hope will move up, but it is likely to back-and-fill several times along the way. Understanding the structure of basic Box trades will help you increase your profitability. The technique relies on a two-step process.
Let’s look at BOX. (Yes, there really is such a ticker symbol! But don’t confuse this with “Box” as a strategy.) The stock may be trending up over time, so it would make sense to sell Puts. The stock seems to drop dramatically every few months, sometimes in response to earnings announcements.
We know that a “box” one dollar wide would bring in $1.00 in credits (Puts and Calls together). Anything beyond that is pure profit. Here are some steps:
- Sell an at-the-money credit spread using Puts for at about 50% of available credit using the 25/24 stikes.
- Place order to sell to Calls for the rest of the box for about 80-90% of the available credit.
If the second order fills, then the stock price went up. If it doesn’t fill then the price went down. Just wait. When the price goes up enough, the Calls will fill, giving you an over-stuffed box, and a no-lose trade.
Here is the formulae.
[ Cr 1 + Cr 2 ] - [S1 - S2] = Profit
Now let’s calculate the profit from this trade.
Credit from Puts .50
Credit from Calls .85
Total credit 1.35
Strike 1 - Strike 2 1.00
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Net Profit .35
Observe the flat green P/L line at $350. Notice that the profit is the same no matter where the stock price is.
You can also sell deeper in-the-money, receiving a higher first credit. This means you need less from the second credit to turn the overall trade into a no-loser.
Maximum available credit would be twice the distance between the strikes, in this case $2. But that amount of credit is unlikely, and only under exceptional circumstances.
TIP: Don’t go for too much credit on the second leg. You can fill it whenever the overall box is profitable, but waiting until the second credit is at 99% is unnecessary and unlikely to fill at all.
TRADERS’ EDGE: In an uptrending stock, fill your Put credits on a down day. For a down-trending stock, fill your Call credits on an up day.
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