Compare Strategies:

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

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

Long Put Vs Short Box (Arbitrage)

  Long Put Short Box (Arbitrage)
Long Put Logo Short Box (Arbitrage) Logo
About Strategy A Long Put strategy is a basic strategy with the Bearish market view. Long Put is the opposite of Long Call. Here you are trying to take a position to benefit from the fall in the price of the underlying asset. The risk is limited to premium while rewards are unlimited. Long put strategy is similar to short selling a stock. This strategy has many advantages over short selling. This includes the maximum risk is the premium paid and lower investment. The challenge with this strategy is that options have an expiry, unlike stocks which you can hold as long as you want. Let's assume you are bearish on NIFTY and expects its price to fall. You can deploy a Long Put strategy by buying an ATM PUT Option of NIFTY. If the price of NIFTY share... Read More 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 Bearish Neutral
Strategy Level Beginners Advance
Options Type Put Call + Put
Number of Positions 1 4
Risk Profile Limited None
Reward Profile Unlimited Limited
Breakeven Point Strike Price of Long Put - Premium Paid

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

  Long Put Short Box (Arbitrage)
When to use?

A long put option strategy works well when you're expecting the underlying asset to sharply decline or be volatile in near future.

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 Bearish

When you are expecting a drop in the price of the underlying and rise in the volatility.

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 Put Option

Let's assume you're Bearish on Nifty currently trading at 10,400. You expect it to fall to 10,000 level. You buy a Put option with a strike price 10,000. If the Nifty goes below 10,000, you will make a profit on exercising the option. In case the Nifty rises contrary to expectation, you will incur a maximum loss of the premium.

  • 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 Strike Price of Long Put - Premium Paid

The breakeven is achieved when the strike price of the Put Option is equal to the premium paid.


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

  Long Put Short Box (Arbitrage)
Risks Limited

The risk for this strategy is limited to the premium paid for the Put Option. Maximum loss will happen when price of underlying is greater than strike price of the Put option.

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

This strategy has the potential to earn unlimited profit. The profit will depend on how low the price of the underlying drops.

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 Option exercised

  • Maximum Profit = Unlimited
  • Maximum Profit Achieved When Price of Underlying = 0
  • Profit = Strike Price of Long Put - Premium Paid
Maximum Loss Scenario

Underlying goes up and Option not exercised

  • Max Loss = Premium Paid + Commissions Paid
  • Max Loss Occurs When Price of Underlying >= Strike Price of Long Put

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

  Long Put Short Box (Arbitrage)
Advantages

Unlimited profit potential with risk only limited to loss of premium.

  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

You may incur 100% loss in premium if the underlying price rises.

  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 Protective Call, Short Put, Long Straddle







Search Chittorgarh.com:

Download Our Mobile App

Android App iOS App