Buying/Selling the Box & Conversions

Discussion in 'Options' started by Soon2Bgreat, Dec 7, 2007.

  1. So a box is:

    40 strike
    -S call
    -L put

    50 strike
    -L call
    -S put

    -Is that considered buying or selling the box?
    -Will this yield a final credit or debit?
    -What will the P/L look like during the trade?

    Lastly, does early exercise affect this at all. I assume not since you will be getting the full premium, in which case you wait out the legs and proceed as if it hadn't been called that correct?

    The only risks here are pin risk and rho risk correct?

  2. You're short the box. Yield is dependent on execution. To earn above the risk-free rate you must sell the box for an amount > the strike differential + carry [on the S-D]. There is assignment risk in an American box, but the leveraged risk is rho.