Long Box Spread Position
(1) A combination of a long synthetic stock or index position (long call plus short put) and a short synthetic stock position (long put plus short call) which expire simultaneously and which have different strike prices. An alternate view of a box spread might combine put and call spreads. Box spreads were once used almost exclusively to transfer gains from one tax year to the next. With changes in the tax code they are used primarily to 'borrow' or 'lend' money. A lender is said to 'buy' the box and a borrower is said to 'sell' the box. They are evaluated essentially on the basis of returns on the cash they tie up or free up. Index options which have European-style exercise provisions are used most frequently, because early exercise of American-style options destroys the box. (2) Offsetting long and short synthetic stock positions with different expirations. Often used to roll a position to a more distant expiration. If all the transactions opened new positions, the result would be a box spread. If one synthetic opened a distant position and the other closed a near position, it would be a jellyroll. See Jellyroll, Synthetic Stock (2), Time Box. (3) An over- the-counter interest rate spread contract.
|
