Box Spread

In our previous sections, we've examined some of the most fundamental options trading strategies. Now we'll take a look at some more advanced combinations.

For instance,  we’ve seen the bull spread and we’ve seen the bear spread both working separately.  How about when you use them both working together? In that case, you’ll have what is known as a box spread. In other words, when you open a bull spread and a bear spread at the same time and on the same underlying commodity, you’re said to be opening a box spread. With a box spread, you’ll achieve maximum profits whether the price of the underlying commodity increases or decreases in value.


You’re looking to open a box spread on CBOT wheat. The price of wheat is currently $3.55 a bushel. First: you decide to open a bull spread by using puts. So you sell a December 3.55 put and receive a premium of $600, and you buy a December 3.50 put and pay a premium of $250. Your account is credited with + $350. Second: to complete the box spread you open a bear spread position, and decide to do it with calls. So you buy a 3.60 call for $450, and sell a December 3.70 call for $300. Your debit balance on the bear spread is $150. 

  1. If the price of wheat rises between 3.55 and 3.60, you close the bull spread at a profit of $350.
  2. If the price of wheat rises between 3.60 and 3.70, you can close your bear spread at a profit as soon as it passes your break-even point.
  3. If the price of wheat rises above 3.70, the call you bought and the call you sold will rise dollar for dollar.
  4. If the price of wheat declines from 3.55 to 3.50, you’ll earn limited profits from your bull spread position.
  5. Once the price of wheat goes below 3.50, the put you sold and the put you bought will move dollar for dollar.


As you can see, as the price of the commodity moves in either direction, you can close either the bull or the bear part of the box spread for a profit. If the price of the commodity suddenly reverses, you’ll profit from your other positions. With a box spread, your total profit potential and total risks are based on the balance of your total credits and total debits from the option premiums.



In our examples, we’ve been using vertical spreads by entering options with different striking prices but with identical expiration dates. If we entered options on a spread with different expiration dates, then we would be using a calendar spreads (also known as Time Spreads). There are two types of calendar spreads: Horizontal and Diagonal.

Horizontal Spread

You use options that have the same strike prices but different expiration dates.


Suppose it’s January and wheat is going for $3.30 a bushel. You decide to enter a horizontal spread using puts. First, you sell a March 3.00 corn put for $300. Second, you buy a May 3.00 corn put for $500. Thus, this entire operation cost you $200. If your March option expires worthless, you will have made $300 from your short position. And even though you’re still down $200 from your long position, you still have 2 months for this option to become profitable.

On the other hand, if the price of wheat falls below the 3.00 level, your long position protects you dollar for dollar from the risk on the short position. Your total risk, therefore, would be the $200. And should the price continue falling beyond March, you’ll begin to enter the profit zone from your May long position.

Finally, if the price of wheat rises, you’ll make $300 from your March short position, but you’ll lose $500 from your May long position. The purpose of this horizontal spread, is that if you had just entered this trade by buying a May 3.00 put and nothing else, your total risk would have been $500. The attraction of the horizontal spread, is that it reduced your exposure from $500 to only $200.


Diagonal Spread

You use options with different strike prices and different expiration dates.


Using the same wheat example as before, you decide to enter the trade creating a diagonal spread instead. Let’s say you want to trade call options. You sell a 3.40 March wheat call and collect a premium of $400. Then you buy a May 3.50 call and pay a premium of $200. At this point, your profit is $200.

  1. If the price of wheat falls, you’ll make a $400 profit from your March short position, and lose $200 from your May long position. Therefore, your net profit is $200.
  2. If the price of wheat rises, you’ll begin to lose from your March short position, but your May long position will increase in value. Your maximum risk is $300 (.10 x 5,000 bu = $500;  $200 – $500 = -$300.)

Finally, after the March short call expires, you still have 2 months left for your May call to become profitable.

In conclusion, entering this diagonal spread allowed us to narrow our loss zone to only a 10 cent range, while limiting our possible losses to only $300. In the same manner, it allowed us to profit in both directions: On the short side, up to $200 net profit. And on the long side, profits could be potentially unlimited.

Throughout this tutorial, we’ve seen a number of different possible strategies for trading options. Obviously, you can construct them in many different ways. Each technique or combination of techniques serves a specific purpose. Either to lower your investment risk, limit your possibilities of losses, increase your odds of winning, and/or increase your profit potential. In any case, it’s tremendously rewarding to devise and execute a well-planned strategy. And as you’ve seen, you don’t even need to know whether the price of a commodity is going to go up or down, since with some of these techniques you can profit in both directions.

What you do need to know for sure, is exactly how much you’re risking and exactly how much you can make. And just as importantly, what are the odds of winning or losing. In short, the name of the game here is knowledge. And believe it or not, you’ve just gained more knowledge than most of the people that are actually currently trading futures or stock options!