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+Chapter 27: Arbitrage 441 
+between 50 and 60 at expiration. In that case, the out-of-the-money, written options 
+would expire worthless-the January 60 call and the January 50 put. This would leave 
+a long, in-the-money combination consisting of a January 50 call and a January 60 
+put. These two options must have a total value of 10 points at expiration with XYZ 
+between 50 and 60. (For example, the arbitrageur could exercise his call to buy stock 
+at 50 and exercise his put to sell stock at 60.) Finally, assume that XYZ is below 50 at 
+expiration. The calls would expire worthless if that were true, but the remaining put 
+spread- actually a bear spread in the puts -would be at its maximum potential of 10 
+points. Again, the box spread could be liquidated for 10 points. 
+The arbitrageur must pay a cost to carry the position, however. In the prior 
+example, if interest rates were 6% and he had to hold the box for 3 months, it would 
+cost him an additional 14 cents (.06 x 9½ x 3112). This still leaves room for a profit. 
+In essence, a bull spread ( using calls) was purchased while a bear spread ( using 
+puts) was bought. The box spread was described in these terms only to illustrate the 
+fact that the arbitrageur is buying and selling equivalent positions. The arbitrageur 
+who is utilizing the box spread should not think in terms of bull or bear spread, how­
+ever. Rather, he should be concerned with "buying" the entire box spread at a cost of 
+less than the differential between the two striking prices. By "buying" the box spread, 
+it is meant that both the call spread portion and the put spread portion are debit 
+spreads. Whenever the arbitrageur observes that a call spread and a put spread using 
+the same strikes and that are both debit spreads can be bought for less than the dif­
+ference in the strikes plus carrying costs, he should execute the arbitrage. 
+Obviously, there is a companion strategy to the one just described. It might 
+sometimes be possible for the arbitrageur to "sell" both spreads. That is, he would 
+establish a credit call spread and a credit put spread, using the same strikes. If this 
+credit were greater than the difference in the striking prices, a risk-free profit would 
+be locked in. 
+Example: Assume that a different set of prices exists: 
+XYZ common, 75 
+XYZ April 70 call, 8½ 
+XYZ April 70 put, 1 
+XYZ April 80 call, 3 
+XYZ April 80 put, 6 
+By executing the following transactions, the box spread could be "sold":