Long Box – The Option Strategy Desk Reference

Long Box

Strategy: Buy n ITM Calls, 56 DTE

Sell n OTM Calls, Same Expiry

Buy n ITM Puts, Same Expiry

Sell n OTM Puts, Same Expiry

Example:

Price Chart: Strong Directional Price Moves

Current IV%: 50%

IV Rank: 50

Trade: Buy n ITM call options; sell n OTM call options; buy n ITM put options; sell n OTM put options.

Typical Strike Deltas:

ITM Long Calls 0.55 to 0.65

OTM Short Calls 0.45 to 0.30

ITM Long Puts 0.55 to 0.65

OTM Short Puts 0.45 to 0.30

Goals: This strategy benefits from a strong directional price move that favors one of the long options and the opposite short option. For example, a price rally favors the long call and short put, while a price drop favors the long put and the short (uncovered) call. As the strike of a long option moves deeper ITM, the short option moves farther OTM. When adjusted, the resulting risk profile that corresponds to a rally resembles either a synthetic long or synthetic short stock. The risk profile that corresponds to a drop resembles a synthetic short stock.

Manage: This is a bidirectional strategy that requires careful management. The best outcome is a long-term directional price move that is detected early by the trader. Once the losing options are closed, the trader must monitor the price of the underlying to ensure that the directional move continues to benefit the remaining long and short options.

Profit: If the price of the underlying continues a directional rally or drop and the losing long and short options are closed, this trade can return a profit that exceeds 30 percent.

Loss: If the trade is adjusted to accommodate a directional price move and the price reverses direction, close the remaining options to prevent a loss that exceeds 10 percent.