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 counter-
ing it with a higher strike Short Synthetic Future. The long and short positions can-
cel each other out, and we are left with a straight horizontal line. The trick is to ensure
that the sum of our net purchases is less than the sum of our 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 we’re buying ITM options
and selling OTM 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, we 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 we’re looking to conduct
the type of trade outlined previously, where we leg in and out. Ideally, we want a big
fall followed by a big rise, or vice versa, and we leg out in accordance with our orig-
inal motivation for doing the trade in the first place.
P/L Profile
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