In options trading, what is a box spread used for?
A box spread, like a conversion spread or a reverse conversion spread, is an arbitrage position. Excluding pin risk, it creates a risk-free, albeit small, return. A box spread can be either a credit or a debit spread. If you create it for a credit, the initial credit plus the interest received on that credit should be enough to pay the cost of closing the spread (the difference between the two strikes) at expiry. If you create it for a debit, the initial debit plus the interest on the debit amount should be less than the credit you receive when closing the spread (the difference between the two strikes) at expiry. For all practical purposes you can forget about looking for arbitrage positions in listed options. The only way to create one with a positive return is to leg into it, which defeats the whole purpose of an arbitrage position. The closest I have every come to creating an arbitrage spread is a split-strike conversion, which is not really an arbitrage spread. I do know of one op
