Box spread (futures)


In futures trading, a box spread is a spread constructed from two consecutive butterfly spreads, summing to +1 -3 +3 -1 in consecutive, or at least equally spaced, contracts. It derives its hedging construction from characteristics of Pascal's Triangle.

Definition

The term also has an alternative meaning within the context of inter-commodity spreads whereby it refers to either an inter-commodity spread within one month offset by the same inter-commodity spread but in another month. Often presumed not to move much they typically, but not always, trade in a range.

Examples

As a Double Butterfly

Given two butterfly spreads with common overlapping wings:
The difference between the two results in a "double butterfly":
A box/double butterfly can also be constructed using a mixture of calendar spreads to achieve the same result:

As an inter-commodity box spread

Given two related instruments that trade as inter-commodity based instruments:
The resulting position is roughly equivalent to two calendar spreads utilizing the same months:
As another example, "buying the Cal 13-12, SP-NP box spread", would be buying power at CAISO hub SP versus selling power at CAISO hub NP for 2013, while also doing the opposite for 2012.. Another pair of contracts that commonly trade box spreads are WTI and Brent crude oil, either in the form of intra-commodity calendar spreads for WTI and Brent using the same calendar expirations for each or different expiration WTI/Brent inter-commodity spreads. One motivation for trading a box would be to roll an existing two-leg spread position to another time period. E.g., to roll one's existing 2012 SP-NP spread position out to 2013, or to trade the box spread itself by taking a view that there will be a widening or narrowing of the spread within the box itself.