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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.

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

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 |

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.

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 |

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

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.

**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.

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.

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

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 |

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.

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 |

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

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.

## Patidar Samaj

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