What is a box spread?
Where have you heard about box spreads?
If you've dabbled in options trading, you might have heard of a box spread - but may not have used it. Because it's a complicated method, it's usually used by seasoned traders and requires a large number of trades.
What you need to know about box spreads.
To execute the box spread, a trader buys a bull and bear spread with identical strike prices and expiry dates. The box is purchased at a lower price than the combined value of the spreads upon expiry, so the trader locks in a profit fairly easily.
However, the box spread is often referred to as the alligator spread because the sheer number of spreads you need to purchase can offset all the gains, resulting in a loss. It's important to pay careful attention to the commissions payable when you're implementing this strategy.