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Box spread

A bull call spread plus a bear put spread at the same two strikes; a package worth exactly the strike width at expiration, used as a synthetic loan.

A box has no market risk. At expiration it is worth the distance between the strikes, no matter what the underlying does. Buying one for less than that width is lending money; selling one for more than that width is borrowing money.

Institutions use boxes to borrow or lend at rates better than their broker offers, using European index-options so nothing can be assigned early. Doing the same with american-style-options is dangerous: one early assignment breaks the package and leaves naked legs.

Example: XYZ at $50, using the $45 and $55 strikes. The box must settle at $10.00. Sell it for $9.88 today and you have borrowed $988 per contract and will repay $1,000 — a $12 interest cost, or roughly 4.9% annualised over 90 days.

Related: conversion, put-call-parity, european-style-option

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