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Long Combo Vs Short Box (Arbitrage) Options Trading Strategy Comparison

Compare Long Combo and Short Box (Arbitrage) options trading strategies. Find similarities and differences between Long Combo and Short Box (Arbitrage) strategies. Find the best options trading strategy for your trading needs.

Long Combo Vs Short Box (Arbitrage)

  Long Combo Short Box (Arbitrage)
Long Combo Logo Short Box (Arbitrage) Logo
About Strategy A long Combo strategy is a Bullish Trading Strategy employed when a trader is expecting the price of a stock, he is holding to move up. It involves selling an OTM Put and buying an OTM Call. The strategy requires less capital as the cost of Call Option is covered by premium received from Put Option. Say SBI shares are currently trading at Rs 500. You are bullish on it but doesn't want to invest or have capital to do it. You can use Long Combo strategy here by selling a Put option of SBI at strike price of Rs 400 and buying a Call Option at a strike price of Rs 600. You will earn premium on sell Put Option and pay premium on buying Call Option. you are investing less but will benefit if SBI shares rises as per your expectations. Short Box is an arbitrage strategy. It involves selling 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 short box strategy is opposite to Long Box (or Box Spread). It is used when the spreads are overpriced with respect to their combined expiration value. This strategy is the 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. ... Read More
Market View Bullish Neutral
Strategy Level Advance Advance
Options Type Call + Put Call + Put
Number of Positions 2 4
Risk Profile Unlimited None
Reward Profile Unlimited Limited
Breakeven Point Call Strike + Net Premium

When and how to use Long Combo and Short Box (Arbitrage)?

  Long Combo Short Box (Arbitrage)
When to use?

Long Combo strategy should be deployed when you're Bullish on an underlying but don't have the required capital or the risk appetite to invest directly into it.

Being risks free arbitrage strategy, this strategy can earn better return than earnings in interest from fixed deposits for any investor. 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 short box strategy should be used when the component spreads are overpriced 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 underpriced, another strategy named Long Box (or Box Spread) 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 Bullish

When you are expecting the price of the underlying to move up in near future.

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
  • Sell OTM Put Option
  • Buy OTM Call Option

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

Say for XYZ stock, the component spread is relatively overpriced than its underlying. You can execute execute Short Box strategy by selling 1 ITM Call and 1 ITM Put while buying 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 Call Strike + Net Premium

Compare Risks and Rewards (Long Combo Vs Short Box (Arbitrage))

  Long Combo Short Box (Arbitrage)
Risks Unlimited

Long Combo is a high risk strategy. You will start losing money when the price of the underlying moves below the lower strike price. Your losses can be unlimited depending on how low the price of underlying falls.

None

The Short 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 Unlimited

Long Combo is a high return strategy. You will earn profits if the underlying moves above the higher price of the underlying. Your profit will depend on how high the price of the underlying moves.

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 up and Call option exercised

Maximum Loss Scenario

Underlying goes down and Put option exercised

Pros & Cons or Long Combo and Short Box (Arbitrage)

  Long Combo Short Box (Arbitrage)
Advantages

Brings down the cost of investing in a Bullish stocks. And delivers high returns if prices move up.

  1. In short box, you are taking money in, so there's no capital tied up.
  2. This is an Arbitrage strategy. This strategy is to earn small profits with very little or zero risks.
Disadvantage

Losses can be high if prices don't move as expected.

  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.
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