Last Updated: Dec 14, 2022 - 01:15 am 208.5k Views
New Page 1

The Short Box Spread is an arbitrage strategy that will be implemented with the combination of Bear Call spread along with Bull Put spread with the same expiry and strike price.

## When to initiate a Short Box Spread?

Short Box Spread is initiated to capture riskless profit when the spreads are overpriced in relation to their expiration value.

## How to construct a Short Box Spread?

Short Box Spread can be created by Selling 1 ITM call, Buying 1 OTM call, Selling 1 ITM put and buying 1 OTM put of the same underlying security with the same expiry and same strike price. Strike price can be customized as per the convenience of the trader; however, the upper and lower strike must be same for call and put.

 Strategy Sell 1 ITM Call, Buy 1 OTM Call, Sell 1 ITM Put and Buy 1 OTM Put Market Outlook Neutral Motive Earn risk free profit Risk Risk-free arbitrage, No risk involved Reward Limited Margin required Yes

## Let’s try to understand with an example:

 Nifty Current spot price (Rs) 9500 Sell 1 ITM call of strike price (Rs) 9400 Premium received (Rs) 270 Buy 1 OTM call of strike price (Rs) 9600 Premium paid (Rs) 115 Sell 1 ITM put of strike price (Rs) 9600 Premium received (Rs) 112 Buy 1 OTM put of strike price (Rs) 9400 Premium paid (Rs) 51 Lot Size 75 Net Premium received (Rs) 216 Expiration value of Box 200 Risk-free arbitrage 16

Suppose Nifty is trading at 9500. Short Box Spread is currently trading at Rs 216, the actual value of box on expiry should be 200. Since the current value of box is more than its expiration value, a risk free arbitrage of Rs 16 is possible. Selling the box will result in a net premium received of Rs 16,200 (216*75). The expiration value of the box is computed as: 9600-9400=200, which is Rs 15000 (200*75). Since you have collected Rs 216 for shorting the box, your profit comes to Rs 16 after buying it back for Rs 200. Therefore, risk-free profit would be Rs 1,200(16*75).

For the ease of understanding of the payoff, we did not take in to account commission charges. Following is the payoff chart and payoff schedule assuming different scenarios of expiry.

## The Payoff Schedule:

 On Expiry NIFTY closes at Net Payoff from 1 ITM Call Sold (Rs) 9400 Net Payoff from 1 OTM Call Bought (Rs) 9600 Net Payoff from 1 ITM Put Sold (Rs) 9600 Net Payoff from 1 OTM Put Bought (Rs.) 9400 Net Payoff (Rs) 8900 270 -115 -588 449 16 9000 270 -115 -488 349 16 9100 270 -115 -388 249 16 9200 270 -115 -288 149 16 9300 270 -115 -188 49 16 9400 270 -115 -88 -51 16 9500 170 -115 12 -51 16 9600 70 -115 112 -51 16 9700 -30 -15 112 -51 16 9800 -130 85 112 -51 16 9900 -230 185 112 -51 16 10000 -330 285 112 -51 16

## Impact of Options Greeks before expiry:

Overall Greek impact on this strategy will be neutral as this strategy provides risk free return.

## Analysis of Short Box Spread:

A Short Box Spread is only used when the value of box is overpriced, so you can short and hold the position till expiry. However, this strategy should be used by advanced traders as the gain from short box is very minimal, the commission payable when implementing this strategy can wipe out all the profits, so this strategy should only be implemented when the charges paid are lower than the expected profit.

### Start Investing in 5 mins*

Rs. 20 Flat Per Order | 0% Brokerage

Open Free Demat Account
Resend OTP
Mobile No. belongs to

By proceeding, you agree to the T&C.

Latest Blogs
Analysis of Upcoming IPO - Mukka Proteins Limited

What Mukka Proteins Do? Products containing fish protein are produced by Mukka Proteins Limited. firm manufactures & distributes fish meal, fish oil, & fish soluble paste—all necessary components for creation of aqua feed, which is used for fish & shrimp, poultry feed, which is used for broilers & layers, & pet food, which is used for dog & cat food. Upcoming IPO, exports its products to following countries

Market Outlook for 23 February 2024

Nifty witnessed a sharp correction during the opening hour on the weekly expiry day. The index sneaked below the 21900 mark, but it started recovering in the later part of the day and as it surpassed the 22000 mark, the momentum accelerated in the last hour of trade. The index rallied sharply to register a new high and end the day above 22200.

Stock in Action – Bajaj Consumer Ltd

Bajaj Consumer Stock Movement of Day