Bull Call Spread Vs Short Box (Arbitrage) Options Trading Strategy Comparison

A Bull Call Spread strategy works well when you're Bullish of the market but expect the underlying to gain mildly in near future.

Being risks free arbitrage strategy, this strategy can earn better return than earnings in interest from fixed deposits for any investor. The earning from this strategy varies with the strike price chosen by the trader. i.e. Earning from strike price '10400, 10700' will be different from strike price combination of '9800,11000'.

The short box strategy should be used when the component spreads are overpriced in relation to their expiration values. In most cases, the trader has to hold the position till expiry to gain the benefits of the price difference.

Note: If the spreads are underpriced, another strategy named Long Box (or Box Spread) can be used for a profit.

This strategy should be used by advanced traders as the gains are minimal. The brokerage payable when implementing this strategy can take away all the profits. This strategy should only be implemented when the fees paid are lower than the expected profit.

When you are expecting a moderate rise in the price of the underlying.

The market view for this strategy is neutral. The movement in underlying security doesn't affect the outcome (profit/loss). This arbitrage strategy is to earn small profits irrespective of the market movements in any direction.

• Buy ITM Call Option
• Sell OTM Call Option

A Bull Call Spread strategy involves Buy ITM Call Option + Sell OTM Call Option.

For example, if you are of the view that Nifty will rise moderately in near future then you can Buy NIFTY Call Option at ITM and Sell NIFTY 50 Call Option at OTM. You will earn massively when both of your Options are exercised and incur huge losses when both Options are not exercised.

• Buy Call Option 2
• Sell Call Option 1
• Buy Put Option 2
• Sell Put Option 1 (2>1)

Say for XYZ stock, the component spread is relatively overpriced than its underlying. You can execute execute Short Box strategy by selling 1 ITM Call and 1 ITM Put while buying 1 OTM Call and 1 OTM Put. There is no risk of loss while the profit potential would be the difference between two strike prices minus net premium.

The trade will result in a loss if the price of the underlying decreases at expiration. The maximum loss is limited to net premium paid.

Max Loss = Net Premium Paid

Max Loss happens when the strike price of Call is less than or equal to price of the underlying.

The Short Box Spread Options Strategy is a relatively risk-free strategy. There is no risk in the overall position because the losses in one spread will be neutralized by the gains in the other spread.

The trades are also risk-free as they are executed on an exchange and therefore cleared and guaranteed by the exchange.

The small risks of this strategy include:

1. The cost of trading - Some brokers charges high brokerage/fees, which along with the taxes could make the overall loss-making trade.
2. The box spread can be liquidated by an offsetting transaction easily and transparently on an exchange with minimal loss/profit.

Limited To The Difference Between Two Strike Prices Minus Net Premium

Maximum profit happens when the price of the underlying rises above strike price of two Calls. The profit is limited to the difference between two strike prices minus net premium paid.

Max Profit = (Strike Price of Call 1 - Strike Price of Call 2) - Net Premium Paid

The reward in this strategy is the difference between the total cost of the box spread and its expiration value. Being an arbitrage strategy, the profits are very small.

It's an extremely low-risk options trading strategy.

Both options exercised

Both options unexercised

Instead of straightaway buying a Call Option, this strategy allows you to reduce cost and risk of your investments.

1. In short box, you are taking money in, so there's no capital tied up.
2. This is an Arbitrage strategy. This strategy is to earn small profits with very little or zero risks.

Profit potential is limited.

1. It's a professional strategy and not for retail investors. The opportunities are closely monitored by High-Frequency algorithms. These arbitrage opportunities are usually for the high-frequency algorithms and need large pools of money to make it worth it and usually with better brokerage commission schemes.
2. This strategy has high margin maintenance requirements and in many cases, the trader won't have the margin available to do that.
3. For retail investors, the brokerage commissions don't make this a viable strategy. Only low-fee traders can take advantage of this.
4. In theory, this strategy sounds good but in reality, it may not as profits are small.
5. Locking the box - Trader has to wait until to expiry by keeping the money stuck in the box.

• Box Spread or Long Box