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+Chapter 27: Arbitrage 443 
+arbitrage with the box spread. It can be evaluated at a glance. Only two questions 
+need to be answered: 
+1. If one were to establish a debit call spread and a debit put spread, using the same 
+strikes, would the total cost be less than the difference in the striking prices plus 
+carrying costs? If the answer is yes, an arbitrage exists. 
+2. Alternatively, if one were to sell both spreads - establishing a credit call spread 
+and a credit put spread - would the total credit received plus interest earned be 
+greater than the difference in the striking prices? If the answer is yes, an arbi­
+trage exists. 
+There are some risks to box arbitrage. Many of them are the same as those risks 
+faced by the arbitrageur doing conversions or reversals. First, there is risk that the 
+stock might close at either of the two strikes. This presents the arbitrageur with the 
+same dilemma regarding whether or not to exercise his long options, since he is not 
+sure whether he will be assigned. Additionally, early assignment may change the prof­
+itability: Assignment of a short put will incur large carrying costs on the resulting long 
+stock; assignment of a short call will inevitably come just before an ex-dividend date, 
+costing the arbitrageur the amount of the dividend. 
+There are not many opportunities to actually transact box arbitrage, but the fact 
+that such arbitrage exists can help to keep markets in line. For example, if an under­
+lying stock begins to move quickly and order flow increases dramatically, the special­
+ist or market-markers in that stock's options may be so inundated with orders that 
+they cannot be sure that their markets are correct. They can use the principles of box 
+arbitrage to keep prices in line. The most active options would be the ones at strikes 
+nearest to the current stock price. The specialist can quickly add up the markets of 
+the call and put at the nearest strike above the stock price and add to that the mar­
+kets of the options at the strike just below. The sum of the four should add up to a 
+price that surrounds the difference in the strikes. If the strikes are 5 points apart, 
+then the sum of the four markets should be something like 4½ bid, 5½ asked. If, 
+instead, the four markets add up to a price that allows box arbitrage to be established, 
+then the specialist will adjust his markets. 
+VARIATIONS ON EQUIVALENCE ARBITRAGE 
+Other variations of arbitrage on equivalent positions are possible, although they are 
+relatively complicated and probably not worth the arbitrageur's time to analyze. For 
+example, one could buy a butterfly spread with calls and simultaneously sell a but­
+terfly spread using puts. A listed straddle could be sold and a synthetic straddle