Cryptocurrency traders employ the use of various arbitrage strategies as a way of leveraging different opportunities. One of the common strategies they apply is known as Box Spread. As is common with arbitrage, everything boils down to the underpricing or overpricing of a commodity.
Understanding Box Arbitrage equips an investor to be successful in cryptocurrency trading. The weapon of having one more investment strategy to call upon cannot be overemphasized. Some terms to be familiar with are:
1. Box Spread: This arbitrage strategy involves the combination of a bull call spread and a bear put spread that corresponds. One other thing that needs to be present is for both vertical spreads to share the same date of expiration and strike price. At the date of expiration the box can be used if the spreads are underpriced. This strategy, also known as Long Box, only sees an investor make a profit when the cost of a box is less than the spread existing between strike prices.
2. Short Box: This is a reversal of the box spread tactic. The strategy concerns itself with having the box sold in the event that it is overpriced. Such situations occur when the box costs more than whatever spread exists between both strike prices.
3. Bull Call Spread: The elements of this vertical spread option strategy is the existence of a strike price and an expiration date. Cryptocurrency investors apply it when they believe that the price of a commodity will not go higher than a certain amount within the given period.
4. Bear Put Spread: Investors make use of this option strategy whenever they believe that the price of a commodity will fall. This tactic which is also known as the "bear put debit spread" bothers with buying a commodity at a strike price and have it sold at a lower strike rate upon expiration.
5. Strike Price: For a box arbitrage contract to be exercised, there has to be an agreed price in place. It means different things for both call and put options. In the case of a call option, it is the price at which an investor can buy a commodity before it expires. When strike price is mentioned with respect to put options, it refers to the price at which an investor can sell a commodity before its expiration date.
How Does Box Arbitrage Work?
This approach means that an investor does not bother where the underlying closes in the knowledge that what is to be gotten depends on the difference between the bull call spread and bear put spread strike prices.
This does not always end up in the making of a profit because commissions are likely to eat up profit. Commissions charged on this sort of investment strategy is what every investor should be on the lookout for.
Box arbitrage offers investors an opportunity to combine two strategies in the purchase of commodities. With a strike price and an expiration date in place, investors know that the difference in strike prices will give them a profit assuming commissions do not eat it up.