Definition
The box is the primary building block of option arbitrage. Under most circumstances, the box represents a set of relationships that forever tie together the love triangle between calls, puts and stocks.
Sets of Relationships
- Long Call + Short Put = Long Synthetic Stock – Buying a call and selling a put of the same strike and expiration month leaves a trader with a position that, in most respects, mimics a long stock position at the strike in question and for the amount of time remaining until expiration.
- Short Call + Long Put = Short Synthetic Stock – Selling a call and buying a put of the same strike and expiration month leaves a trader with a position that, in most respects, mimics a short stock position at the strike in question and for the amount of time remaining until expiration.