Long Box

 

Description

 

The Long Box is a complex strategy that can (in some jurisdictions) have beneficial effects for tax planning from year to year. If your incentive for this strategy is a tax play, you should consult with your tax advisor beforehand to evaluate whether or not it is valid where you live.

 

The strategy involves creating a lower strike Long Synthetic Future and countering it with a higher strike Short Synthetic Future. The long and short positions cancel each other out, and you are left with a straight horizontal line.

 

The trick is to ensure that the sum of your net purchases is less than the sum of your net sales in order to make a profit. Remember, there are four legs in this strategy, two longs and two shorts, and the strategy is typically a net debit because you are buying in-the-money options and selling out-of-the-money options.

 

Some traders who are sitting on vast capital gains will seek to close out the loss making legs of the strategy just before the end of the tax year, thereby setting off those losses against their gains and reducing their capital gains tax bill for that year.

         

However, you need to remember that any open short positions are generally treated as 100% gains until the position is closed.

 

High volatility is good for the Long Box, particularly if you are looking to conduct the type of trade outlined previously, where you leg in and out. Ideally, you want a big fall followed by a big rise, or vice versa, and leg out in accordance with your  original motivation for doing the trade in the first place.

                  

Market Opinion

 

Directional neutral.

 

P/L

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

When To Use

 

Use this strategy as a hedge for tax purposes.

 

Example

 

XXXX is trading t $34.92 on June 4, 2011.

Sell August 2011 30 strike puts at $1.00.

Buy August 2011 30 strike calls at $6.00.

Buy August 2011 strike puts at $6.20.

Sell August 2011 40 strike calls at $1.20.

 

 

Benefit

 

The benefit is that if this trade is executed properly, it can hedge your tax obligation.

 

 

Risk vs. Reward

 

The risk is the net credit or net debit minus the difference between strikes. The reward is the same.

 

 Net Upside

 

The difference between strikes minus the net debit paid or net credit received.

 

Net Downside

 

The net credit received or net debit paid, minus difference in strikes.

 

Break Even Point

 

N/A

 

Effect Of Volatility

 

High volatility has a positive effect.

 

Effect Of Time Decay

 

Positive. Maximum profit is made at expiration.

 

Alternatives Before Expiration

 

Never hold the long options into the last month before expiration.

 

You can unravel as elements of the trade become profitable or are making a loss.

 

Alternatives After Expiration

 

Close out the trade.