#### Nilesh Jain

20 Jun 2017

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.

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• ### Patidar Samaj

- 2 hrs ago

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Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest.

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### Budget 2017 - Arun Jaitley’s Call on the Country’s Taxation System

#### Nilesh Jain

20 Jun 2017

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.

Have Referral Code?