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+Chapter 33: Mathematical Considerations for Index Products 643 
+For index futures options, there is no risk when the underlying closes near the 
+strike, since they settle for cash. One is not forced to make a choice as to whether to 
+exercise his calls. (See Chapter 27 on arbitrage for a description of risks at expiration 
+when trading reversals or conversions.) 
+In actual practice, floor traders may attempt to establish conversions in futures 
+options for small increments - perhaps 5 or 10 cents in S&P futures, for example. 
+The arbitrageur should note that futures options do actually create a credit or debit 
+in the account. That is, they are like stock options in that respect, even though the 
+underlying instrument is not. This means that if one is using a deep in-the-money 
+option in the conversion, there will actually be some carrying cost involved. 
+Example: An index future is trading at 179.00 and one is going to price the 
+December 190 conversion, assuming that December expiration is 50 days away. 
+Assume that the current carrying cost of money is 10% annually. Finally, assume that 
+the December 190 call is selling for 1.00, and the December 190 put is selling for 
+11.85. Note that the put has a time value premium of only 85 cents, less than the pre­
+mium of the call. The reason for this is that one would have to pay a carrying cost to 
+do the December 190 conversion. 
+If one established the 190 conversion, he would buy the futures (no credit or 
+debit to the account), buy the put (a debit of 11.85), and sell the call (a credit of 1.00). 
+Thus, the account actually incurs a debit of 10.85 from the options. The carrying cost 
+for 10.85 at 10% for 50 days is 10.85 x 10% x 50/365 = 0.15. This indicates that the 
+converter is willing to pay 15 cents less time premium for the put (or conversely that 
+the reversal trader is willing to sell the put for 15 cents less time premium). Instead 
+of the put trading with a time value premium equal to the call price, the put will trade 
+with a premium of 15 cents less. Thus, the time premium of the put is 85 cents, 
+rather than being equal to the price of the call, 1.00. 
+BOX SPREADS 
+Recall that a "box" consists of a bullish vertical spread involving two striking prices, 
+and a bearish vertical spread using the same two strikes. One spread is constructed 
+with puts and the other with calls. The profitability of the box is the same regardless 
+of the price of the underlying security at expiration. 
+Box arbitrage with equity options involves trying to buy the box for less than the 
+difference in the striking prices, for ~ple, trying to buy a box in which the strikes 
+are 5 points apart for 4. 75. Selling the box for more than 5 points would represent 
+arbitrage as well. In fact, even selling the box at exactly 5 points would produce a 
+profit for the arbitrageur, since he earns interest on the credit from the sale.