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Short Strangle (Sell Strangle) Vs Box Spread (Arbitrage) Options Trading Strategy Comparison

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

Short Strangle (Sell Strangle) Vs Box Spread (Arbitrage)

  Short Strangle (Sell Strangle) Box Spread (Arbitrage)
Short Strangle (Sell Strangle) Logo Box Spread (Arbitrage) Logo
About Strategy The Short Strangle (or Sell Strangle) is a neutral strategy wherein a Slightly OTM Call and a Slightly OTM Put Options are sold simultaneously of same underlying asset and expiry date. This strategy can be used when the trader expects that the underlying stock will experience a very little volatility in the near term. It is a limited profit and unlimited risk strategy. The maximum profit earn is the net premium received. The maximum loss is achieved when the underlying moves either significantly upwards or downwards at expiration. A net credit is taken to enter into this strategy. For this reason, the Short Strangles are Credit Spreads. The usual Short Strangle Strategy looks like as below for NIFTY current index value at 10400 (NIFTY S... 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 Neutral Neutral
Strategy Level Advance Advance
Options Type Call + Put Call + Put
Number of Positions 2 4
Risk Profile Unlimited None
Reward Profile Limited Limited
Breakeven Point two break-even points

When and how to use Short Strangle (Sell Strangle) and Box Spread (Arbitrage)?

  Short Strangle (Sell Strangle) Box Spread (Arbitrage)
When to use?

The Short Strangle is perfect in a neutral market scenario when the underlying is expected to be less volatile.

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 Neutral

When you are expecting little volatility and movement in the price of the underlying.

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 Call
  • Sell OTM Put

Sell 1 out-of-the-money put and sell 1 out-of-the-money call which belongs to same underlying asset and has the same expiry date.

  • 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 two break-even points

A strangle has two break-even points.

Lower Break-even = Strike Price of Put - Net Premium

Upper Break-even = Strike Price of Call+ Net Premium"


Compare Risks and Rewards (Short Strangle (Sell Strangle) Vs Box Spread (Arbitrage))

  Short Strangle (Sell Strangle) Box Spread (Arbitrage)
Risks Unlimited

The maximum loss is unlimited in this strategy. You will incur losses when the price of the underlying moves significantly either upwards or downwards at expiration.

Loss = Price of Underlying - Strike Price of Short Call - Net Premium Received

Or

Loss = Strike Price of Short Put - Price of Underlying - 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

For maximum profit, the price of the underlying on expiration date must trade between the strike prices of the options. The maximum profit is limited to the net premium received while selling the Options.

Maximum Profit = Net Premium Received

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

Both Option not exercised

Maximum Loss Scenario

One Option exercised

Pros & Cons or Short Strangle (Sell Strangle) and Box Spread (Arbitrage)

  Short Strangle (Sell Strangle) Box Spread (Arbitrage)
Advantages

The strategy offers higher chance of profitability in comparison to Short Straddle due to selling of OTM Options.

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

Limited reward with high risk exposure.

  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 Short Straddle, Long Strangle







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