Box spread risks

Discussion in 'Options' started by surfer25, May 7, 2013.

  1. Hi,
    Can someone please explain the risks of a box spread with regards to dividends or early assignment?
  2. 1245


    If you sell it, you can get assigned on the ITM call and end up with a short stock position. If you sell it, and the stock goes down, you can get an early exercise on the ITM put and end up with a long stock position. The long position can cost you interest. The short position can cost you a dividends or hard to borrow fees. The only risk of buying the box is pin risk, which of course you have selling it too.

  3. Say you're short the $10 box at 70/80 and there is an upcoming ex-div date. It's close to expiration and the call is trading under the implied fwd. Call owner exercises and now you're long the synthetic and short the natural. The box was implied but now you are short the actual shares and if it's HTB you are at risk on borrow. It's riskier to short the box in terms of variability on terms related to shorting the natural (actual shares).

    Or there is no div out to expiration and the call buyer is deep ITM and wants the shares but would have to cover the call at a discount to fairval.
  4. Thanks for the answers. So if I sell a box spread at a price higher than the difference between the strike prices, and I do get assigned early on the short call of the box spread, what should I do immediately to curtail any possible losses? Also, what are the losses limited to considering I am long the higher strike call and collected the credit upon opening the box spread?
  5. If not HTB (hard to borrow) for the life of the option you only lose any dividend. If it goes HTB and there is stock available, your losses are capped at the borrow cost, which could be substantial. If there is actually no stock available for borrow, then your losses are unlimited if the stock soars. In the last situation, there is no hedge at all. This happened to me recently in UNXL.