Why Does the Construction of a Box Spread Remove All Directional Exposure?
A box spread is a combination of a synthetic long asset position (lower strike) and a synthetic short asset position (higher strike). The long position gains when the asset price rises, and the short position gains when it falls.
By holding both simultaneously, the gains and losses from the underlying asset's directional movement perfectly offset each other. This neutralization of Delta exposure leaves only the fixed, interest-rate-dependent payoff.
Glossar
Synthetic Short
Strategy ⎊ A synthetic short position in cryptocurrency derivatives, particularly options, represents a strategy designed to profit from an anticipated decline in the underlying asset's price without directly shorting the asset itself.
Box Spread
Arbitrage ⎊ A box spread is fundamentally an arbitrage strategy, constructed by simultaneously buying a bull call spread and selling a bear put spread with identical strike prices and expiration dates.
Synthetic Long
Definition ⎊ A Synthetic Long position is a financial engineering technique where a combination of derivative instruments is utilized to replicate the exact risk and reward profile of owning the underlying asset outright.
Delta Exposure
Definition ⎊ Delta Exposure represents the directional sensitivity of a derivatives portfolio to changes in the price of the underlying cryptocurrency asset.