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.