Box Spread - The Box Spread in Futures

The Box Spread in Futures

A box spread in futures contracts is a spread from two consecutive butterfly spreads, summing to +1 -3 +3 -1 in consecutive, or at least equally spaced, contracts. Often presumed not to move much (as in theory they are practically non directional) and therefore trade in a range.

For linear commodities instruments (i.e., futures, forwards, swaps), "box spread" is used to refer to a four-leg position consisting of long a two-leg spread in one time period, and short the same two-leg spread in another time period. For instance, "buying the Cal 13-12, SP-NP box spread", would be buying power at CAISO hub SP-15 versus selling power at CAISO hub NP-15 for 2013, while also doing the opposite (so, selling at SP-15 and buying at NP-15) for 2012. (Customarily, a leg that is purchased is mentioned before a leg that is sold. And commonly, the more expensive leg is also mentioned first (to avoid using a negative spread price). Therefore, the way that the CAISO box spread is referred to suggests that SP is trading over NP, and SP-minus-NP is wider in 2013 than in 2012.) One motivation for trading a box would be to roll an existing two-leg spread position to another (typically later) time period. E.g., to roll one's existing 2012 SP-NP spread position out to 2013 (i.e., close 2012 and replace with 2013). Another motivation would be to trade the box position itself, taking a view that there will be a trend for a two-leg spread (widening or narrowing) over time.