box spreads

Discussion in 'Options' started by xenolith, Feb 27, 2007.

  1. xenolith


    a newb question:

    i was looking at some option quotes (april google to be exact) and saw the following:

    if one were to:

    sell GOOG APR 590 Puts
    buy GOOG APR 590 Calls
    buy GOOG APR 460 Puts
    sell GOOG APR 460 Calls

    the bid/ask for the spread is: 132.55 / 134.05.

    So if one were to put on this box spread he would be assured of a profit of 2.55. Are these types of spreads feasable, or will there be problems selling this spread?

  2. ChrisM


    Looks like free lunch ;)

    I don`t think you can open such in real world. These bid/ask spreads on spreads sometimes are tricky. Which service are you using ?
  3. xenolith


    these quotes were from optionsxpress....but the odd thing is that from what i can tell, when you put together a spread on the optionsxpress trading screen, they quote the spread from the nbbo of all the individual legs.
    That's why I was surprised (and now i'm curious whether it's actually possible to earn risk-free moneys....)
  4. ChrisM


    These applications sometimes show unrealistic combinations.

    Don`t be curious. If there was such trade like this, MMs and arbitrage programs would drain everything to the last penny.
  5. xenolith


    hmm, but at the same time if you took the individual quotes of all those options, and legged in (selling on bid and buying on ask of each leg), you still get a spread that earns a risk-free profit of 2.25....

    sell GOOG APR 590 Puts @ 136.40
    buy GOOG APR 590 Calls @ 0.15
    buy GOOG APR 460 Puts @ 22.40
    sell GOOG APR 460 Calls @ 18.40

    the total being of course: 132.25

    So i'm wondering how this is possible (or why it's impossible to do...)
  6. xenolith


    mskl, why is the theoretical worth more than $130 on american options, and not european? If you get assigned the 590 puts, wouldn't the premium earned offset the loss?
  7. nikko309


    Newb answer:

    Your GOOG box shows a profit of approximately $255

    Since you are selling the 590 puts for below parity, you will most likely be assigned early, if not immediately.

    The carry cost @ 5.25% until April on $453 stock is about $255

    Guess what? There are no free lunches (g)
  8. This "newb answer" is absolutely right.

    Early assignment is all but guaranteed, and you've got to include carrying costs.
  9. xenolith


    thx guys, very clear answers...
  10. stevenao


    I am another newbie. Can someone explain where selling a put below the current stock price will trigger an early assignment and carry a cost before the expiration date?

    #10     Jan 26, 2008