442 
Sell a call (bear) spread: 
Buy April 80 call 
Sell April 70 call 
Net credit on calls 
Sell a put (bull) spread: 
Buy April 70 put 
Sell April 80 put 
Net credit on puts 
Total credit of position 
3 debit 
81/2 credit 
1 debit 
6 credit 
Part IV: Additional Considerations 
5 credit 
10 1/2 credit 
In this case, no matter where XYZ is at expiration, the position can be bought back 
for 10 points. This means that the arbitrageur has locked in risk-free profit of¼ 
point. To verify this statement, first assume that XYZ is above 80 at April expiration. 
The puts will expire worthless, and the call spread will have widened to 10 points -
the cost to buy it back. Alternatively, if XYZ were between 70 and 80 at April expira­
tion, the long, out-of-the-money options would expire worthless and the in-the­
money combination would cost 10 points to buy back. (For example, the arbitrageur 
could let himself be put at 80, buying stock there, and called at 70, selling the stock 
there - a net "cost" to liquidate of 10 points.) Finally, if XYZ were below 70 at expi­
ration, the calls would expire worthless and the put spread would have widened to 10 
points. It could then be closed out at a cost of 10 points. In each case, the arbitrageur 
is able to liquidate the box spread by buying it back at 10. 
In this sale of a box spread, he would earn interest on the credit received while 
he holds the position. 
There is an additional factor in the profitability of the box spread. Since the sale 
of a box generates a credit, the arbitrageur who sells a box will earn a small amount 
of money from that sale. Conversely, the purchaser of a box spread will have a charge 
for carrying cost. Since profit margins may be small in a box arbitrage, these carrying 
costs can have a definite effect. As a result, boxes may actually be sold for 5 points, 
even though the striking prices are 5 points apart, and the arbitrageur can still make 
money because of the interest earned. 
These box spreads are not easy to find. If one does appear, the act of doing the 
arbitrage will soon make the arbitrage impossible. In fact, this is true of any type of 
arbitrage; it cannot be executed indefinitely because the mere act of arbitraging will 
force the prices back into line. Occasionally, the arbitrageur will be able to find the 
option quotes to his liking, especially in volatile markets, and can establish a risk-free