Contents

Box

What is a BOX?

  • Box is an arbitrage strategy where the options trader takes advantage of mis-pricings in the options market. 
  • If you look at the pay-off diagram below, you can clearly see that this strategy is not affected by price movement.
  • You can get assured profits, if you can identify the mis-pricing and lock in the options at the right prices.
  • Let us first look at the trade set up below before diving deep.

Trade Set-Up

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Sell 1 lower strike OTM PUT

short put-Finvezto

Buy same lower strike ITM Call

Naked Call 1-Finvezto

Buy 1 higher strike ITM PUT

Naked Put-Finvezto

Sell same higher strike OTM Call

short call-Finvezto

BOX

 

 

10570377 4455 4305 8f9d 5c4006193e55 1-Finvezto

Illustration Using Nifty Options

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-Finvezto
Snapshot from Upstox.com Strategy Builder

In the pay-off graph above, the price of the underlying asset (Nifty) is plotted in the X-Axis and the profit/loss is plotted in the Y-Axis.

The black line with dots indicates the profit or loss at different prices of the underlying asset.

The region shaded in green indicates profitable zone and the region shaded in grey indicates loss zone.

A positive number (75 = Buy 1 lot) in the Quantity column indicates a Buy position and a negative number (-75 = Sell 1 lot) indicates a Sell position.

How & When to Use?

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  • Box can be looked at as a combination of Long Synthetic Future built at a lower strike price and a Short Synthetic Future built at a higher strike price. This ensures the directional effect of the price is cancelled and allows options traders to capture the mis-pricings in the market.
  • Whatever reward you are able to lock-in while initiating the trade will be your maximum reward. You will get it for sure during expiry. 
  • You need to buy a huge number of lots to ensure you get decent profits. For example, if you initiate the position with 1 lot of all 4 legs, then your profit could be somewhere between ₹50 to ₹ 100.  In the illustration above, you will get ₹25. The profit potential per lot is low. The brokerage you have to pay to set up this strategy might end up being more than the profit. So, you need to buy a huge number of lots to even make a decent profit.
  • On top of it, you need to keep looking for mis-pricings in the market. That too, for a very small profit potential.
  • Also, while setting up the trade, if the bid-ask spread is huge, you might not be able to lock the options at the right price to create an arbitrage opportunity. You also need to execute all 4 legs of the order simultaneously.
  • In Nifty Options, it is very difficult to profit from this strategy as the options are mostly correctly priced. 
  • Instead of trying to force profits through this strategy, it is wise to look at other strategies to pick up good premium decay.
  • Although this strategy can be set up in a way that is risk free, the profit potential is very limited and is viable only if you setup minimum 20 lots of all 4 legs.