Short Box Option Strategy
What are the characteristics of this option strategy?
The Short Box is an advanced option strategy which seeks to take advantage of the difference between the strike prices of a call and put, which share the same expiration date. This strategy is typically composed of four option contracts, two calls and two puts, with the strike price of the puts higher than the strike price of the calls. Investors who purchase the short box strategy benefit from both time decay and a decrease in implied volatility.
Is this a bullish, bearish or neutral strategy?
The Short Box is a neutral strategy, as it attempts to benefit regardless of market direction.
Is this a beginner or an advanced option strategy?
The Short Box is considered an advanced strategy, as it requires a solid understanding of option pricing and the relationship between the strike prices of calls and puts.
In what situation will I use this strategy?
The Short Box is typically used in situations when an investor believes that market volatility will drop and remain low. This is a good strategy to use when an investor is expecting a market consolidation over a given period of time.
Where does this strategy typically fall in the range of risk-reward and probability of profit?
The Short Box typically falls within a fair range of risk-reward and probability of profit. This is a moderate risk strategy, with a higher probability of making a small profit than a large one.
How is this strategy affected by the greeks?
The Short Box is affected by all four of the greeks: delta, gamma, theta and vega. Delta reflects the impact of changes in the underlying price on the strategy, gamma is the rate of change of delta in response to a change in the underlying’s price, theta is the rate at which time decay impacts the strategy, and vega is the response of the strategy to changes in implied volatility.
In what volatility regime (i.e VIX level) would this strategy be optimal?
This strategy is best suited to low volatility regimes, as the lower the level of volatility, the more profitable it will be. A VIX level of 15 or lower is ideal for this strategy.
How do I adjust this strategy when the trade goes against me? And how easy or difficult is this strategy to adjust?
Adjusting the Short Box when it goes against an investor is fairly simple. The investor can roll their positions out to the next available expiration cycle, or they can close out the positions and take their loss. Doing this is relatively straightforward, and the strategy is quite adaptable.
Where does this strategy typically fall in the range of commissions and fees?
The cost of executing the Short Box strategy varies depending on the broker being used, but in general, it should fall well within the range of most brokers’ commission and fee ranges.
Is this a good option income strategy?
The Short Box is not a great option for generating high levels of income, although it can be used to generate small amounts of income. This strategy is more focused on capital gains than income generation.
How do I know when to exit this strategy?
Exiting the Short Box strategy is largely dependent on an investor’s market outlook and risk profile. If the underlying stock moves in an unexpected direction, the investor should consider exiting the strategy. If the investor’s outlook is unchanged and they are comfortable with the current risk-reward level of the strategy, they may opt to remain in the position.
How will market makers respond to this trade being opened?
Market makers typically respond to the opening of a Short Box strategy by adjusting the bid-ask spreads and the prices of the underlying instruments. They may also increase the amount of margin required to open the position.
What is an example (with calculations) of this strategy?
Assuming MSFT is trading at $285, an investor can create a Short Box option strategy by simultaneously selling a call option and buying a put option with the same strike price and expiration date, while also selling another put option and buying another call option with a higher strike price and the same expiration date. The strike price of the higher put option should be equal to the strike price of the lower call option.
To execute this strategy, the investor would do the following:
Sell one out-of-the-money call option with a strike price of $300 and an expiration date of one month from now, receiving a premium of $5 per share.
Buy one out-of-the-money put option with a strike price of $300 and an expiration date of one month from now, paying a premium of $5 per share.
Simultaneously, sell one out-of-the-money put option with a strike price of $290 and an expiration date of one month from now, receiving a premium of $3 per share.
Buy one out-of-the-money call option with a strike price of $290 and an expiration date of one month from now, paying a premium of $3 per share.
The resulting payoff diagram of this strategy will look like a box with equal sides, hence the name Short Box.
Here’s how the strategy works:
If MSFT’s price is between the strike prices of $290 and $300 by the expiration date, all four options will expire worthless, resulting in a net credit equal to the total premiums received.
If MSFT’s price is above the strike price of $300 by the expiration date, the investor will be assigned on the short call option and forced to sell MSFT at $300, while also being exercised on the long put option and forced to buy MSFT at $300. However, the investor can exercise the long call option to buy MSFT at $290, and then sell it at $300 using the assigned short call option, resulting in a profit of $10 per share, which offsets the loss from the long put option.
If MSFT’s price is below the strike price of $290 by the expiration date, the investor will be assigned on the short put option and forced to buy MSFT at $290, while also being exercised on the long call option and forced to sell MSFT at $290. However, the investor can exercise the long put option to sell MSFT at $300, and then buy it at $290 using the assigned short put option, resulting in a profit of $10 per share, which offsets the loss from the long call option.
MarketXLS and how it can help?
MarketXLS is an invaluable tool for options traders looking to use the Short Box strategy. It provides data on the underlying instruments, allowing traders to get an up-to-date view of the market. MarketXLS also provides a live options chain and tools to analyze the greeks, making it a powerful trading platform for this strategy. In addition, MarketXLS makes it easy to manage and adjust the Short Box positions in realtime, as they can receive notifications when market conditions change.
Here are some templates that you can use to create your own models
Search for all Templates here: https://marketxls.com/templates/
Relevant blogs that you can read to learn more about the topic
Maximizing Profits with a Bull Put Spread Strategy
Conversion Arbitrage Options Strategy