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What Is a Box Option?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 25 April 2019
  • Copyright Protected:
    2003-2019
    Conjecture Corporation
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A box option is type of investment strategy involving the use of sets of puts and calls as a means of increasing the chances of generating some amount of return from the combination of trades. Typically, this process will involve arranging two sets of pulls and calls that will have the same expiration date, although differing in the exercise price associated with each of the transactions. When the combination of the puts and calls are arranged properly, this approach greatly enhances the potential of earning some sort of return, usually by posting a loss on some of the trades but more than making up the difference on the other trades.

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By creating a box option with a defined set of puts and calls, the investor effectively creates a situation in which those transactions can be enacted to respond to most market conditions. Depending on how the market impacts the investments involved, the investor may choose to simply allow the calls to expire, such as if the market price of the investment involves remains essentially the same throughout the period under consideration. At other times, the calls may be exercised in conjunction with the puts, creating a situation in which any losses incurred with the calls can be offset with the puts. Whether the market moves in a bearish direction, meaning that the prices of the securities involve fall, or a bullish marketing in which those security values increase, the investor can assess the situation and execute the puts and calls in whatever manner will yield the highest level of return.

While using some sort of box option strategy does greatly reduce the potential for experiencing a loss, there is still some degree of risk involved. One key area of risk is in the selection of the securities involved in the strategy and exactly how the puts and calls are themselves arranged in relationship to those securities. There is also some risk in terms of misreading what is happening in the marketplace and choosing to execute the trades involved in the strategy in a manner that in fact does not respond to the market movement. When this happens, the amount of return that is ultimately realized is reduced at best, or may even be non-existent.

Creating a reasonable box option does involve careful selection of the securities used in the approach, as well as being able to understand what is happening in the marketplace. For this reason, investors may choose to seek professional assistance in arranging this type of strategy, especially if they have little experience with this short of approach to investing. A broker can help an investor identify investments that are likely to produce a decent yield within a defined time frame and aid in structuring the puts and calls involved with the box option to best advantage.

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