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Risks of box spreads?
Hey,Read heard that there are substantial risks with trading box spreads on American Options...especially when it comes to assignment/delivery/exercise.Can anybody give me a run down as to where the risks come from? For example: If you sell a $20/$21 box spread while the underlying is trading at $10. Then the other guy early exercises the put. What kind of risks are there?Thanks!
Last edited by 60202 on October 20th, 2014, 10:00 pm, edited 1 time in total.
Risks of box spreads?
A box is just a zero coupon bond. If someone assigns you on a short leg, just replace the delta's, and/or exercise a long leg (when appropriate).
Risks of box spreads?
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Risks of box spreads?
Since a box is just a zero coupon bond you need to be certain you are using the correct discounting level.Equity desks are not always great on (collateral driven) discounting.If someone sophisticated in discounting offers you a box trade in size then be very sure you know what you are doing.