What is a box spread?

A box spread is a specific options trading strategy that involves combining a bull spread and a bear spread with different strike prices or exercise prices. The essence of a box spread lies in its construction, as it capitalizes on arbitrage opportunities by simultaneously buying and selling options with differing strikes but the same expiration date.

By creating these spreads, an investor can lock in a risk-free profit, regardless of how the underlying asset performs. The bull spread, which profits when the price rises, and the bear spread, which profits when the price falls, together form a position that has limited risk and creates a defined range of outcomes. This approach effectively allows investors to take advantage of mispricing in the options market.

In contrast, other choices do not accurately describe a box spread. For example, simply having a combination of put and call options with the same strike price does not yield the unique risk and potential profit structure of a box spread. Similarly, a single investment position with low risk or a type of index spread used in equity trading do not capture the essence of what a box spread entails, which is primarily about the combination of different spreads. Understanding these distinctions is crucial for grasping the strategic advantages box spreads offer in the options market.