Chittorgarh.com Logo
Loading...
Compare Strategies:

Long Straddle (Buy Straddle) Vs Short Box (Arbitrage) Options Trading Strategy Comparison

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

Long Straddle (Buy Straddle) Vs Short Box (Arbitrage)

  Long Straddle (Buy Straddle) Short Box (Arbitrage)
Long Straddle (Buy Straddle) Logo Short Box (Arbitrage) Logo
About Strategy The Long Straddle (or Buy Straddle) is a neutral strategy. This strategy involves simultaneously buying a call and a put option of the same underlying asset, same strike price and same expire date. A Long Straddle strategy is used in case of highly volatile market scenarios wherein you expect a big movement in the price of the underlying but are not sure of the direction. Such scenarios arise when company declare results, budget, war-like situation etc. This is an unlimited profit and limited risk strategy. The profit earns in this strategy is unlimited. Higher volatility results in higher profits. The maximum loss is limited to the net premium paid. The max loss occurs when underlying asset price on expire remains at the strike price. ... 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 Neutral Neutral
Strategy Level Beginners Advance
Options Type Call + Put Call + Put
Number of Positions 2 4
Risk Profile Limited None
Reward Profile Unlimited Limited
Breakeven Point 2 break-even points

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

  Long Straddle (Buy Straddle) Short Box (Arbitrage)
When to use?

The strategy is perfect to use when there is market volatility expected due to results, elections, budget, policy change, war etc.

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 Neutral

When you are not sure on the direction the underlying would move but are expecting the rise in its 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 Call Option
  • Buy Put 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 2 break-even points

A straddle has two break-even points.

Lower Breakeven = Strike Price of Put - Net Premium

Upper breakeven = Strike Price of Call + Net Premium


Compare Risks and Rewards (Long Straddle (Buy Straddle) Vs Short Box (Arbitrage))

  Long Straddle (Buy Straddle) Short Box (Arbitrage)
Risks Limited

The maximum loss for long straddle strategy is limited to the net premium paid. It happens the price of underlying is equal to strike price of options.

Maximum Loss = Net Premium Paid

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

There is unlimited profit opportunity in this strategy irrespective of the direction of the underlying. Profit occurs when the price of the underlying is greater than strike price of long Put or lesser than strike price of long Call.

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

Max profit is achieved when at one option is exercised.

Maximum Loss Scenario

When both options are not exercised. This happens when underlying asset price on expire remains at the strike price.

Pros & Cons or Long Straddle (Buy Straddle) and Short Box (Arbitrage)

  Long Straddle (Buy Straddle) Short Box (Arbitrage)
Advantages

Earns you unlimited profit in a volatile market while minimizing the loss.

  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

The price change has to be bigger to make good profits.

  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 Long Strangle, Short Straddle