
Box or Conversion
Class: Precision |
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These spreads are referred to as “locked trades” because |
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their value at expiration is totally independent of the price of |
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the underlying instrument. If you can buy them for less than |
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that value or sell them for more, you will make a profit |
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(ignoring commission cost). |
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When to use: |
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Occasionally, a market will get out of line enough to justify |
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an initial entry into one of these positions. However, they |
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are most commonly used to “lock” all or part of a portfolio |
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by buying or selling to create the missing “legs” of the |
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position. These are alternatives to closing out positions at |
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possibly unfavorable prices. |
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Long Box: |
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Long a bull spread, long a bear spread – that is, |
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long call A, Short call B, long put B, short put A. Value = |
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B -A. |
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Short Box: |
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Long call B, short call A, long put A, short put B. |
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value = A – B. |
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Long-instrument conversion: |
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Long instrument, long put A, short call A. Value = 0. |
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“Price” = instrument + put – A -call. |
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Short-instrument conversion: |
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Short instrument, long call A, short put A. Value = 0. |
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“Price” = A + call – instrument -put. |
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