consider I buy the following spread: buy a call and sell a put at strike of 1 sell a call and buy a put at strike of 3 net debit paid is $190, leaving $10 of profit upon expiration If the stock rallies from $2 to $10 and my $3 strike call is exercised early, couldn't I simply counteract that by early exercising the call I purchased at $1 strike, making the 200 dollars from that for the $10 profit and then sell the remaining puts/let them expire OTM? I'm failing to understand why early exercise is such a risk
This is how some people blew up their account, including famous 1R0NYMAN. The main issue is that profitable box spread is simply not possible because market makers price all options appropriately to prevent arbitrage. The only time when a box appears to be cheaper than it should be is when a stock has very high %interest rate for shorting it. So you'll get assigned 100 short shares overnight and have to pay huge %interest on it by the morning, or for 3 nights if assigned on Friday. The other party will earn overnight %interest by holding the shares they obtained through option/call exercise.