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

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.

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

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.

• 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.

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.

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.

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.

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.

Underlying goes up and Call option exercised

Underlying goes down and Put option exercised

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.

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.

• Box Spread or Long Box