Chittorgarh.com Logo
Loading...
Compare Strategies:

Bear Call Spread Vs Box Spread (Arbitrage) Options Trading Strategy Comparison

Compare Bear Call Spread and Box Spread (Arbitrage) options trading strategies. Find similarities and differences between Bear Call Spread and Box Spread (Arbitrage) strategies. Find the best options trading strategy for your trading needs.

Bear Call Spread Vs Box Spread (Arbitrage)

  Bear Call Spread Box Spread (Arbitrage)
Bear Call Spread Logo Box Spread (Arbitrage) Logo
About Strategy A Bear Call Spread strategy involves buying a Call Option while simultaneously selling a Call Option of lower strike price on same underlying asset and expiry date. You receive a premium for selling a Call Option and pay a premium for buying a Call Option. So your cost of investment is much lower. The strategy is less risky with the reward limited to the difference in premium received and paid. This strategy is used when the trader believes that the price of underlying asset will go down moderately. This strategy is also known as the bear call credit spread as a net credit is received upon entering the trade. The risk and reward both are limited in the strategy. How to use the bear call spread options strategy? The bear call spr... Read More Box Spread (also known as Long Box) is an arbitrage strategy. It involves buying a Bull Call Spread (1 ITM and I OTM Call) together with the corresponding Bear Put Spread (1 ITM and 1 OTM Put), with both spreads having the same strike prices and expiration dates. The strategy is called Box Spread as it is combination of 2 spreads (4 trades) and the profit/loss calculated together as 1 trade. Note that the total cost of the box remain same irrespective to the price movement of underlying security in any direction. The expiration value of the box spread is actually the difference between the strike prices of the options involved. The Long Box strategy is opposite to Short Box strategy. It is used when the spreads are under-priced with respe... Read More
Market View Bearish Neutral
Strategy Level Beginners Advance
Options Type Call Call + Put
Number of Positions 2 4
Risk Profile Limited None
Reward Profile Limited Limited
Breakeven Point Strike Price of Short Call + Net Premium Received

When and how to use Bear Call Spread and Box Spread (Arbitrage)?

  Bear Call Spread Box Spread (Arbitrage)
When to use?

The bear call spread options strategy is used when you are bearish in market view. The strategy minimizes your risk in the event of prime movements going against your expectations.

Being risks free arbitrage strategy, this strategy can earn better return than earnings in interest from fixed deposits. The earning from this strategy varies with the strike price chosen by the trader. i.e. Earning from strike price '10400, 10700' will be different from strike price combination of '9800,11000'.

The long box strategy should be used when the component spreads are underpriced in relation to their expiration values. In most cases, the trader has to hold the position till expiry to gain the benefits of the price difference.

Note: If the spreads are overprices, another strategy named Short Box can be used for a profit.

This strategy should be used by advanced traders as the gains are minimal. The brokerage payable when implementing this strategy can take away all the profits. This strategy should only be implemented when the fees paid are lower than the expected profit.

Market View Bearish

When you are expecting the price of the underlying to moderately go down.

Neutral

The market view for this strategy is neutral. The movement in underlying security doesn't affect the outcome (profit/loss). This arbitrage strategy is to earn small profits irrespective of the market movements in any direction.

Action
  • Buy OTM Call Option
  • Sell ITM Call Option

Let's assume you're Bearish on Nifty and are expecting mild drop in the price. You can deploy Bear Call strategy by selling a Call Option with lower strike and buying a Call Option with higher strike. You will receive a higher premium for selling a Call while pay lower premium for buying a Call. The net premium will be your profit. If the price of Nifty rises, your loss will be limited to difference between two strike prices minus net premium.

  • Buy Call Option 1
  • Sell Call Option 2
  • Buy Put Option 1
  • Sell Put Option 2 (2>1)

Say for XYZ stock, the component spreads are underpriced in relation to their expiration values. The trader could execute Long Box strategy by buying 1 ITM Call and 1 ITM Put while selling 1 OTM Call and 1 OTM Put. There is no risk of loss while the profit potential would be the difference between two strike prices minus net premium.

Breakeven Point Strike Price of Short Call + Net Premium Received

The break even point is achieved when the price of the underlying is equal to strike price of the short Call plus net premium received.


Compare Risks and Rewards (Bear Call Spread Vs Box Spread (Arbitrage))

  Bear Call Spread Box Spread (Arbitrage)
Risks Limited

The maximum loss occurs when the price of the underlying moves above the strike price of long Call.

Maximum Loss = Long Call Strike Price - Short Call Strike Price - Net Premium Received

None

The Box Spread Options Strategy is a relatively risk-free strategy. There is no risk in the overall position because the losses in one spread will be neutralized by the gains in the other spread.

The trades are also risk-free as they are executed on an exchange and therefore cleared and guaranteed by the exchange.

The small risks of this strategy include:

  1. The cost of trading - Some brokers charges high brokerage/fees, which along with the taxes could make the overall loss-making trade.
  2. The box spread can be liquidated by an offsetting transaction easily and transparently on an exchange with minimal loss/profit.
Rewards Limited

The maximum profit the net premium received. It occurs when the price of the underlying is greater than strike price of short Call Option.

Max Profit = Net Premium Received - Commissions Paid

Limited

The reward in this strategy is the difference between the total cost of the box spread and its expiration value. Being an arbitrage strategy, the profits are very small.

It's an extremely low-risk options trading strategy.

Maximum Profit Scenario

Underlying goes down and both options not exercised

Maximum Loss Scenario

Underlying goes up and both options exercised

Pros & Cons or Bear Call Spread and Box Spread (Arbitrage)

  Bear Call Spread Box Spread (Arbitrage)
Advantages

It allows you to profit in a flat market scenario when you're expecting the underlying to mildly drop, be range bound or marginally rise.

  1. This is an Arbitrage strategy. This strategy is to earn small profits with very little or zero risks.
Disadvantage

Limited profit potential.

  1. It's a professional strategy and not for retail investors. The opportunities are closely monitored by High-Frequency algorithms. These arbitrage opportunities are usually for the high-frequency algorithms and need large pools of money to make it worth it and usually with better brokerage commission schemes.
  2. This strategy has high margin maintenance requirements and in many cases, the trader won't have the margin available to do that.
  3. For retail investors, the brokerage commissions don't make this a viable strategy. Only low-fee traders can take advantage of this.
  4. In theory, this strategy sounds good but in reality, it may not as profits are small.
  5. Locking the box - Trader has to wait until to expiry by keeping the money stuck in the box.
Simillar Strategies Bear Put Spread, Bull Call Spread