Stocks & Commodities V. 24:9 (40): Expore Your Options by Tom Gentile
Got a question about options? Tom Gentile is the chief options strategist at Optionetics (www.optionetics.com), an education and publishing firm dedicated to teaching investors how to minimize their risk while maximizing profits using options. To submit a question, post it to our website at http://Message-Boards.Traders.com. Answers will be posted there, and selected questions will appear in a future issue of S&C.
Q: I know how to construct a box spread, but why does it work? Is there a way to tell which option(s) are under/overpriced?
A: The box spread is an arbitrage play that can sometimes be used to capture risk-free profits. The difficult part is finding situations ripe for the trade’s
application. It is actually a combination of a bull spread and a bear spread. The spreads can be either debits or credits. Consider the following situation:
XYZ = $47.5 a share
September 45 call = $2.75
September 50 call = $0.50
September 50 put = $3.00
September 45 put = $0.75
The strategist creates two debit spreads, a bull call and a bear put, with the following...