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1. Lecture No 64
Long Box
Rohan Sharma (Coach)

2. Basics Concepts – Long Box
Proficiency - Expert
Direction – Neutral
Volatility – High
Asset Leg –
Short Put + Long Call +
Long Put - Short Call
Max Risk - Limited Max Reward - Limited
Capital Gain
Strategies

3. Description – Long Box
 The Long Box is a complex strategy that can (in some jurisdictions)
have beneficial effects for tax planning from year to year.
If your incentive for this strategy is a tax play, you should consult
with your tax advisor beforehand to evaluate whether or not it is
valid where you live.
The strategy involves creating a lower strike Long Synthetic Future
and countering it with a higher strike Short Synthetic Future.
The long and short positions cancel each other out, and we’re left
with a straight horizontal line.

4. Description – Long Box
The trick is to ensure that the sum of our net purchases is less than
the sum of our net sales in order to make a profit.
Remember, there are four legs in this strategy, two longs and two
shorts, and the strategy is typically a net debit because we’re buying
ITM options and selling OTM options.
High volatility is good for the Long Box, particularly if we’re looking
to conduct the type of trade outlined previously, where we leg in
and out.
Ideally, we want a big fall followed by a big rise, or vice versa, and
we leg out in accordance with our original motivation for doing the
trade in the first place.

5. Description – Long Box
 Sell one lower strike (OTM) put.
Buy same strike (ITM) call.
Buy one higher strike (ITM) put.
Sell same strike OTM call.

6. Steps to Trading a Long Box
Steps In
Identify clear areas of support and resistance that the stock, being volatile
enough, will fluctuate between.
Steps Out
Manage your position according to the rules defined in your Trading Plan.
Remember that the Long Box is a combination of other strategies, so it can be
unraveled in two-leg chunks.
You can unravel the position as parts of the trade become profitable or
lossmaking.
 Never hold the long options into the last month before expiration.
Remember to include all the commissions in your calculations.

7. Context - Long Box
Outlook
With long boxes, your outlook is direction neutral. You expect a lot of
movement in the stock price, preferably between definable areas of support
and resistance.
Rationale
With long boxes, you are looking to execute a form of arbitrage where
the profit is assured, known, and unaffected by market moves.
You are volatility neutral per se, but there can be potential tax
advantages to legging out of the loss-making side first. Professional
advice is a must here.
If you examine what you’ve done here, you have simply combined a Long
Synthetic Future with a Short Synthetic Future at a higher strike.
These two combined effectively cancel each other out, and the idea is to
capture a profit due to mispricing in the market.

8. Context – Long Box
Net Position
This is typically a net debit trade because we’re buying ITM options and
selling OTM options.
Your maximum risk is the net debit or net credit less the difference
between the strikes.
Your maximum reward is the same.
With this trade, you can only have one or the other.
Effect of Time Decay
Time decay is generally helpful because you take your maximum profits
at expiration.
Appropriate Time Period to Trade
It is generally more sensible to use this as a Shorter -term trade.

9. Exiting the Trade - Long Box
Exiting the Position
 With this strategy, you can simply unravel the spread by buying back
the options you sold and selling the options you bought in the first place.
Advanced traders may leg up and down or only partially unravel the
spread as the underlying asset fluctuates up and down.
In this way, the trader will be taking smaller incremental profits before
the expiration of the trade.
Mitigating a Loss
Unravel the trade as described previously.
 Advanced traders may choose to only partially unravel the spread leg-
by-leg and create alternative risk profiles.

10. Advantages and Disadvantages
Advantages
Can be used as a tax hedge if entered and exited correctly either
side of a tax year.
Should be placed in such a way to be virtually risk-free, although as
a tax hedge, you’d need to leg out in stages.
Can be used to create an arbitrage opportunity.
Disadvantages
Requires a large number of contracts to be worth doing.
Complicated trade requiring the assistance of your broker or
accountant.
Bid/Ask Spread can adversely affect the quality of the trade.

11. Real Time Example
Rohan Sharma (Coach)

12. Price Movement
Position on Charts
Rohan Sharma (Coach)

13. Middle Strike

14. Example – Long Box
Market Behavior Nifty
Option /Future Sell OTM Call & Buy Deep OTM Call
Action (Long/ Short) Both
Price Movement Expectation Side Ways
Spot Price 10900
Strike Price (SHORT OTM PUT) 10700 Premium 60
Strike Price (LONG ITM CALL) 10700 Premium 103
Strike Price (LONG HIGHER ITM PUT) 10800 Premium 110
Strike Price (SHORT OTM CALL) 11000 Premium 70
Time to Expiry Mid/Last of the Month
Position of Price in Charts Sideways
Max Risk Limited
Max Reward Limited

15. Long Box
SHORT OTM PUT 10700 Premium 60 BEP 10640
LONG ITM CALL 10700 Premium 103 BEP 10803
LONG HIGHER ITM PUT 10800 Premium 110 BEP 10690
SHORT OTM CALL 11000 Premium 70 BEP 11070
Nifty at
Expiry
SHORT OTM PUT
BEP – 10640
LONG ITM CALL
BEP – 10803
LONG ITM PUT
BEP – 10690
SHORT OTM CALL
BEP - 11070
Total P&L
11400 60 597 -110 -330 217
11300 60 497 -110 -230 217
11200 60 397 -110 -130 217
11100 60 297 -110 -30 217
11000 60 197 -110 70 217
10900 60 97 -110 70 117
10800 60 -3 -110 70 17
10700 60 -103 -163 70 -136
10500 -140 -103 37 70 -136