AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

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happenstance
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AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by happenstance »

I just saw that AlphaArchitect launched a new ETF, BOXX. From the prospectus, this is meant to:

- Be a short-term cash management strategy that offers higher yields than CDs, Treasuries/Treasury ETFs, and Money Markets
- Provide more tax efficiency since they expect distributions to be mostly short- and long-term capital gains, rather than interest
- Have neutral exposure to the market
- Achieve this with S&P 500 options box spreads
- Give individual investors access to institutional lending rates using this strategy

Basically, this seems like the SPX Box Spreads strategy that was discussed on this forum last year. Except AlphaArchitect packages the entire strategy into a no-hassle fund with a 0.19% ER, and you do not need to enable margin or options trading on your brokerage account.

What do people think of this? On paper it sounds pretty attractive, but I also must admit I don’t understand some parts of the prospectus, or where and when the risks would show up with holding this fund.
Kbg
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by Kbg »

Going completely off of memory here...but I think the fee would take up almost all of the benefit of the box strategy.

Of course there is...elimination of fat fingering mistakes, likely better margin/portfolio management, better diversification (sort of) and set it and forget it vs. have to manage boxes yourself. It will be interesting to see the details on how the strategy works in terms of what boxes the do (e.g. how long out).
comeinvest
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by comeinvest »

Interesting. What kind of option is that which they have designated as "2SPX 230317C03000010 3000.01 C" vs the other 3000 call option?

Also interesting, they too are using 3000 and 4000 strike prices, not 1000 and 6000 for example to save commissions. There must be something going on.

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petulant
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by petulant »

How do they think it will generate capital gains instead of interest if all of their transactions fall under 26 U.S.C. § 1258?
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happenstance
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by happenstance »

Kbg wrote: Wed Feb 01, 2023 5:05 pm Going completely off of memory here...but I think the fee would take up almost all of the benefit of the box strategy.

Of course there is...elimination of fat fingering mistakes, likely better margin/portfolio management, better diversification (sort of) and set it and forget it vs. have to manage boxes yourself. It will be interesting to see the details on how the strategy works in terms of what boxes the do (e.g. how long out).
Certainly a possibility, yes. The stated goal of the fund is to match or exceed before expenses a TBill benchmark. I think they hope that access to institutional lending rates will give them an edge. Of course, this fund is brand new and it remains to be seen if they will achieve their objective. I agree that the real advantage the fund has is organizing the strategy into an ETF rather than having to manually roll options.
petulant wrote: Thu Feb 02, 2023 6:11 am How do they think it will generate capital gains instead of interest if all of their transactions fall under 26 U.S.C. § 1258?
I don’t know. Just quoting from the prospectus:
Based on the advice of its accountants, the Fund expects that distributions
related to the Fund’s SPX positions if any, will be characterized by the Fund as capital gains with these preferential
terms.
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Kevin M
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by Kevin M »

Kbg wrote: Wed Feb 01, 2023 5:05 pm Going completely off of memory here...but I think the fee would take up almost all of the benefit of the box strategy.
I think you're right. Looking at at the last attempted purchase entries in my box spread spreadsheet, a gross yield advantage of 45 basis points translates to a taxable-equivalent yield (TEY) advantage of only 16 basis points at my marginal tax rates of 22% and 9.3%. An ER of 19 basis points eliminates any benefit, unless the fund managers can get better executions than I could.

The reason the TEY benefit is less is because of the relatively large state income tax rate of 9.3%, so the state tax exemption of Treasuries eliminates a good chunk of the benefit before considering taxes.
If I make a calculation error, #Cruncher probably will let me know.
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Rick Ferri
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by Rick Ferri »

A few thoughts:

1) Box spreads have been around for decades. It's a strategy that teases the T-bill rate out of SPX options. There is a slight counter-party risk, but it's minimal.
2) This strategy was in favor after the market crash in 1987 because people had capital losses. They substituted taxable income from money market funds and T-bills with the capital gain income created by box spreads.
3) The strategy fell out of favor as interest rates fell to 0%, and the bull market resumed.

If you have a sizable capital loss carryforward from 2022 with no gains in sight to offset those losses against, you could use this strategy to create about a ~ 4% tax-free yield because the ~ 4% gain would be offset by tax-loss carry forward.

Caveat: I'm not a CPA. Consult your tax adviser.

Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.
Kbg
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by Kbg »

I think Rick nailed a key issue...tax treatment and particularly after 2022. I'm planning to do boxes this year for this reason.
secondopinion
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by secondopinion »

Rick Ferri wrote: Thu Feb 02, 2023 12:26 pm A few thoughts:

1) Box spreads have been around for decades. It's a strategy that teases the T-bill rate out of SPX options. There is a slight counter-party risk, but it's minimal.
2) This strategy was in favor after the market crash in 1987 because people had capital losses. They substituted taxable income from money market funds and T-bills with the capital gain income created by box spreads.
3) The strategy fell out of favor as interest rates fell to 0%, and the bull market resumed.

If you have a sizable capital loss carryforward from 2022 with no gains in sight to offset those losses against, you could use this strategy to create about a ~ 4% tax-free yield because the ~ 4% gain would be offset by tax-loss carry forward.

Caveat: I'm not a CPA. Consult your tax adviser.

Rick Ferri
Interesting point. However, I have no losses to carry over really since 2022 was actually a green year for me (I had capital losses from tax loss harvesting, but my speculative activity ate it up).

But maybe I will keep it in mind if I do need it.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by skierincolorado »

Kevin M wrote: Thu Feb 02, 2023 12:11 pm
Kbg wrote: Wed Feb 01, 2023 5:05 pm Going completely off of memory here...but I think the fee would take up almost all of the benefit of the box strategy.
I think you're right. Looking at at the last attempted purchase entries in my box spread spreadsheet, a gross yield advantage of 45 basis points translates to a taxable-equivalent yield (TEY) advantage of only 16 basis points at my marginal tax rates of 22% and 9.3%. An ER of 19 basis points eliminates any benefit, unless the fund managers can get better executions than I could.

The reason the TEY benefit is less is because of the relatively large state income tax rate of 9.3%, so the state tax exemption of Treasuries eliminates a good chunk of the benefit before considering taxes.
Are you sure you did the math right? The tax treatment applies to the entire yield. So at 5% rates your after tax return is 4% with 20% tax rate. At 15% capital gains your return is 4.25% minus the .19%, giving 4.06% which is better than 5% ordinary income with zero fees. At 0% capital gains you'd get 4.81% instead of 4% or less.
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by Walkure »

petulant wrote: Thu Feb 02, 2023 6:11 am How do they think it will generate capital gains instead of interest if all of their transactions fall under 26 U.S.C. § 1258?
Only possible out I can find is this:
(5)Special rule for options dealers and commodities traders
(A)In general
Subsection (a) shall not apply to transactions—
(i)of an options dealer in the normal course of the dealer’s trade or business of dealing in options...

(B)Definitions
For purposes of this paragraph—
(i)Options dealer
The term “options dealer” has the meaning given such term by section 1256(g)(8).
1256 (g)(8)Options dealer
(A)In general
The term “options dealer” means any person registered with an appropriate national securities exchange as a market maker or specialist in listed options.
So, perhaps the ETF manager can make the case that they are a registered "market maker or specialist" providing liquidity in the box spread market, and therefore Subsection (a) does not apply?
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Kevin M
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by Kevin M »

skierincolorado wrote: Thu Feb 02, 2023 5:12 pm
Kevin M wrote: Thu Feb 02, 2023 12:11 pm
Kbg wrote: Wed Feb 01, 2023 5:05 pm Going completely off of memory here...but I think the fee would take up almost all of the benefit of the box strategy.
I think you're right. Looking at at the last attempted purchase entries in my box spread spreadsheet, a gross yield advantage of 45 basis points translates to a taxable-equivalent yield (TEY) advantage of only 16 basis points at my marginal tax rates of 22% and 9.3%. An ER of 19 basis points eliminates any benefit, unless the fund managers can get better executions than I could.

The reason the TEY benefit is less is because of the relatively large state income tax rate of 9.3%, so the state tax exemption of Treasuries eliminates a good chunk of the benefit before considering taxes.
Are you sure you did the math right? The tax treatment applies to the entire yield. So at 5% rates your after tax return is 4% with 20% tax rate. At 15% capital gains your return is 4.25% minus the .19%, giving 4.06% which is better than 5% ordinary income with zero fees. At 0% capital gains you'd get 4.81% instead of 4% or less.
Pretty sure. I derived the TEY formula using the same approach I explained in [Wiki] Taxable Equivalent Yield (TEY) - Bogleheads.org.

One thing to understand is that LTCG is taxed as ordinary income by my state, for which my marginal tax rate is 9.3%. The other thing to remember is that Treasuries are exempt from state income tax.

The after-tax yield (ATY) for a box is the box yield times (1 - ltgp * (fg + sg) - stcg * (f + s) ), where:

ltgp = long-term cap gain percent = 60%.
fg = marginal federal LTCG tax rate, for which I use 15%.
sg = marginal state LTCG tax rate, which for me is 9.3%.
stcg = short-term cap gain percent = 40%.
f = marginal fed tax rate (including NIIT, AMT, etc.)
s = marginal state tax rate

TEY = ATY / (1-f-s)

For a Treasury, the ATY is the yield times (1-f), and as usual, TEY = ATY / (1-f-s),

Kevin
If I make a calculation error, #Cruncher probably will let me know.
petulant
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by petulant »

Walkure wrote: Thu Feb 02, 2023 5:27 pm
petulant wrote: Thu Feb 02, 2023 6:11 am How do they think it will generate capital gains instead of interest if all of their transactions fall under 26 U.S.C. § 1258?
Only possible out I can find is this:
(5)Special rule for options dealers and commodities traders
(A)In general
Subsection (a) shall not apply to transactions—
(i)of an options dealer in the normal course of the dealer’s trade or business of dealing in options...

(B)Definitions
For purposes of this paragraph—
(i)Options dealer
The term “options dealer” has the meaning given such term by section 1256(g)(8).
1256 (g)(8)Options dealer
(A)In general
The term “options dealer” means any person registered with an appropriate national securities exchange as a market maker or specialist in listed options.
So, perhaps the ETF manager can make the case that they are a registered "market maker or specialist" providing liquidity in the box spread market, and therefore Subsection (a) does not apply?
The prospectus says they will buy and hold until around expiration, then buy again. Something tells me a buy and hold box spread purchaser is not a market maker or dealer.
Last edited by petulant on Fri Feb 03, 2023 5:53 am, edited 1 time in total.
skierincolorado
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by skierincolorado »

Kevin M wrote: Thu Feb 02, 2023 5:59 pm
skierincolorado wrote: Thu Feb 02, 2023 5:12 pm
Kevin M wrote: Thu Feb 02, 2023 12:11 pm
Kbg wrote: Wed Feb 01, 2023 5:05 pm Going completely off of memory here...but I think the fee would take up almost all of the benefit of the box strategy.
I think you're right. Looking at at the last attempted purchase entries in my box spread spreadsheet, a gross yield advantage of 45 basis points translates to a taxable-equivalent yield (TEY) advantage of only 16 basis points at my marginal tax rates of 22% and 9.3%. An ER of 19 basis points eliminates any benefit, unless the fund managers can get better executions than I could.

The reason the TEY benefit is less is because of the relatively large state income tax rate of 9.3%, so the state tax exemption of Treasuries eliminates a good chunk of the benefit before considering taxes.
Are you sure you did the math right? The tax treatment applies to the entire yield. So at 5% rates your after tax return is 4% with 20% tax rate. At 15% capital gains your return is 4.25% minus the .19%, giving 4.06% which is better than 5% ordinary income with zero fees. At 0% capital gains you'd get 4.81% instead of 4% or less.
Pretty sure. I derived the TEY formula using the same approach I explained in [Wiki] Taxable Equivalent Yield (TEY) - Bogleheads.org.

One thing to understand is that LTCG is taxed as ordinary income by my state, for which my marginal tax rate is 9.3%. The other thing to remember is that Treasuries are exempt from state income tax.

The after-tax yield (ATY) for a box is the box yield times (1 - ltgp * (fg + sg) - stcg * (f + s) ), where:

ltgp = long-term cap gain percent = 60%.
fg = marginal federal LTCG tax rate, for which I use 15%.
sg = marginal state LTCG tax rate, which for me is 9.3%.
stcg = short-term cap gain percent = 40%.
f = marginal fed tax rate (including NIIT, AMT, etc.)
s = marginal state tax rate

TEY = ATY / (1-f-s)

For a Treasury, the ATY is the yield times (1-f), and as usual, TEY = ATY / (1-f-s),

Kevin
Ah I missed that LTCG is taxed as ordinary income in your state. That would definitely change things. Thank you!
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by GeraniumLover »

petulant wrote: Thu Feb 02, 2023 6:11 am How do they think it will generate capital gains instead of interest if all of their transactions fall under 26 U.S.C. § 1258?
From the prospectus:

"Options on certain exchange-traded indexes, such as the SPX, are currently taxed under section 1256 of the Internal Revenue Code (“IRC”). Pursuant to section 1256 of the IRC, profit and loss on transactions in certain exchange-traded options, including SPX, are subject to taxation at a rate equal to 60% long-term and 40% short-term capital gain or loss regardless of the Fund’s holding period. Based on the advice of its accountants, the Fund expects that distributions related to the Fund’s SPX positions if any, will be characterized by the Fund as capital gains with these preferential terms."
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by petulant »

GeraniumLover wrote: Fri Feb 03, 2023 9:02 am
petulant wrote: Thu Feb 02, 2023 6:11 am How do they think it will generate capital gains instead of interest if all of their transactions fall under 26 U.S.C. § 1258?
From the prospectus:

"Options on certain exchange-traded indexes, such as the SPX, are currently taxed under section 1256 of the Internal Revenue Code (“IRC”). Pursuant to section 1256 of the IRC, profit and loss on transactions in certain exchange-traded options, including SPX, are subject to taxation at a rate equal to 60% long-term and 40% short-term capital gain or loss regardless of the Fund’s holding period. Based on the advice of its accountants, the Fund expects that distributions related to the Fund’s SPX positions if any, will be characterized by the Fund as capital gains with these preferential terms."
The quoted material describes how Section 1256 contracts' returns are treated as capital gains. Section 1258 says that the sale of any property that would result in capital gains but which is really time value of money will have the gains treated as ordinary income. The trigger for Section 1258 would seem to apply to Section 1256 contracts. Section 1258 does not contain an exception for Section 1256 contracts. Section 1256 does have an exception where capital gains treatment does not apply if a contract's treatment would otherwise be ordinary income under the tax code. Hence, there seems to be a strong argument that Section 1258 can apply to Section 1256 contracts and to the specific instruments being used by the BOXX fund.
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GeraniumLover
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by GeraniumLover »

petulant wrote: Fri Feb 03, 2023 9:09 am
GeraniumLover wrote: Fri Feb 03, 2023 9:02 am
From the prospectus:

"Options on certain exchange-traded indexes, such as the SPX, are currently taxed under section 1256 of the Internal Revenue Code (“IRC”). Pursuant to section 1256 of the IRC, profit and loss on transactions in certain exchange-traded options, including SPX, are subject to taxation at a rate equal to 60% long-term and 40% short-term capital gain or loss regardless of the Fund’s holding period. Based on the advice of its accountants, the Fund expects that distributions related to the Fund’s SPX positions if any, will be characterized by the Fund as capital gains with these preferential terms."
The quoted material describes how Section 1256 contracts' returns are treated as capital gains. Section 1258 says that the sale of any property that would result in capital gains but which is really time value of money will have the gains treated as ordinary income. The trigger for Section 1258 would seem to apply to Section 1256 contracts. Section 1258 does not contain an exception for Section 1256 contracts. Section 1256 does have an exception where capital gains treatment does not apply if a contract's treatment would otherwise be ordinary income under the tax code. Hence, there seems to be a strong argument that Section 1258 can apply to Section 1256 contracts and to the specific instruments being used by the BOXX fund.
But if they let the options expire, which is usually done with box spreads, would that be a "sale" under Section 1258?

My bigger question here is whether the income from this fund will in fact be distributed to shareholders or simply rolled into purchases of other boxes. If the latter, then the appreciation would seem to come from NAV increases. To gain access to the income, then, would require sale of shares of BOXX, which would generate capital gains (assuming no losses).
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by petulant »

GeraniumLover wrote: Fri Feb 03, 2023 9:44 am
petulant wrote: Fri Feb 03, 2023 9:09 am
GeraniumLover wrote: Fri Feb 03, 2023 9:02 am
From the prospectus:

"Options on certain exchange-traded indexes, such as the SPX, are currently taxed under section 1256 of the Internal Revenue Code (“IRC”). Pursuant to section 1256 of the IRC, profit and loss on transactions in certain exchange-traded options, including SPX, are subject to taxation at a rate equal to 60% long-term and 40% short-term capital gain or loss regardless of the Fund’s holding period. Based on the advice of its accountants, the Fund expects that distributions related to the Fund’s SPX positions if any, will be characterized by the Fund as capital gains with these preferential terms."
The quoted material describes how Section 1256 contracts' returns are treated as capital gains. Section 1258 says that the sale of any property that would result in capital gains but which is really time value of money will have the gains treated as ordinary income. The trigger for Section 1258 would seem to apply to Section 1256 contracts. Section 1258 does not contain an exception for Section 1256 contracts. Section 1256 does have an exception where capital gains treatment does not apply if a contract's treatment would otherwise be ordinary income under the tax code. Hence, there seems to be a strong argument that Section 1258 can apply to Section 1256 contracts and to the specific instruments being used by the BOXX fund.
But if they let the options expire, which is usually done with box spreads, would that be a "sale" under Section 1258?

My bigger question here is whether the income from this fund will in fact be distributed to shareholders or simply rolled into purchases of other boxes. If the latter, then the appreciation would seem to come from NAV increases. To gain access to the income, then, would require sale of shares of BOXX, which would generate capital gains (assuming no losses).
Section 1258 doesn't just say sale, it says "disposition or other termination."
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by xmysticgohanx »

Kevin M wrote: Thu Feb 02, 2023 12:11 pm
Kbg wrote: Wed Feb 01, 2023 5:05 pm Going completely off of memory here...but I think the fee would take up almost all of the benefit of the box strategy.
I think you're right. Looking at at the last attempted purchase entries in my box spread spreadsheet, a gross yield advantage of 45 basis points translates to a taxable-equivalent yield (TEY) advantage of only 16 basis points at my marginal tax rates of 22% and 9.3%. An ER of 19 basis points eliminates any benefit, unless the fund managers can get better executions than I could.

The reason the TEY benefit is less is because of the relatively large state income tax rate of 9.3%, so the state tax exemption of Treasuries eliminates a good chunk of the benefit before considering taxes.
In other words, unless you're in a state with high income tax , boxx would be superior to treasuries /treasury ETFs?
comeinvest
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by comeinvest »

GeraniumLover wrote: Fri Feb 03, 2023 9:44 am
petulant wrote: Fri Feb 03, 2023 9:09 am
GeraniumLover wrote: Fri Feb 03, 2023 9:02 am
From the prospectus:

"Options on certain exchange-traded indexes, such as the SPX, are currently taxed under section 1256 of the Internal Revenue Code (“IRC”). Pursuant to section 1256 of the IRC, profit and loss on transactions in certain exchange-traded options, including SPX, are subject to taxation at a rate equal to 60% long-term and 40% short-term capital gain or loss regardless of the Fund’s holding period. Based on the advice of its accountants, the Fund expects that distributions related to the Fund’s SPX positions if any, will be characterized by the Fund as capital gains with these preferential terms."
The quoted material describes how Section 1256 contracts' returns are treated as capital gains. Section 1258 says that the sale of any property that would result in capital gains but which is really time value of money will have the gains treated as ordinary income. The trigger for Section 1258 would seem to apply to Section 1256 contracts. Section 1258 does not contain an exception for Section 1256 contracts. Section 1256 does have an exception where capital gains treatment does not apply if a contract's treatment would otherwise be ordinary income under the tax code. Hence, there seems to be a strong argument that Section 1258 can apply to Section 1256 contracts and to the specific instruments being used by the BOXX fund.
But if they let the options expire, which is usually done with box spreads, would that be a "sale" under Section 1258?

My bigger question here is whether the income from this fund will in fact be distributed to shareholders or simply rolled into purchases of other boxes. If the latter, then the appreciation would seem to come from NAV increases. To gain access to the income, then, would require sale of shares of BOXX, which would generate capital gains (assuming no losses).
That would mean you would pay taxes twice, or not? If realized gains within the fund are already passed through to the shareholders on the 1099. Aren't mutual funds and ETFs required to distribute any realized income for that reason?
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GeraniumLover
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by GeraniumLover »

comeinvest wrote: Fri Feb 03, 2023 3:27 pm
GeraniumLover wrote: Fri Feb 03, 2023 9:44 am
My bigger question here is whether the income from this fund will in fact be distributed to shareholders or simply rolled into purchases of other boxes. If the latter, then the appreciation would seem to come from NAV increases. To gain access to the income, then, would require sale of shares of BOXX, which would generate capital gains (assuming no losses).
That would mean you would pay taxes twice, or not? If realized gains within the fund are already passed through to the shareholders on the 1099. Aren't mutual funds and ETFs required to distribute any realized income for that reason?
Having studied the prospectus further, you are correct: the fund is required to distribute any realized income at least annually. So I guess they will keep investing the income in box spreads until they need to raise enough cash for the end-of-year distribution. The amount they have to invest can also increase through the acquisition by brokers of "Creation Units" - 10000 shares of BOXX issued to them by the fund in exchange for the corresponding amount of cash.
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by xmysticgohanx »

GeraniumLover wrote: Sat Feb 04, 2023 1:27 pm
comeinvest wrote: Fri Feb 03, 2023 3:27 pm
GeraniumLover wrote: Fri Feb 03, 2023 9:44 am
My bigger question here is whether the income from this fund will in fact be distributed to shareholders or simply rolled into purchases of other boxes. If the latter, then the appreciation would seem to come from NAV increases. To gain access to the income, then, would require sale of shares of BOXX, which would generate capital gains (assuming no losses).
That would mean you would pay taxes twice, or not? If realized gains within the fund are already passed through to the shareholders on the 1099. Aren't mutual funds and ETFs required to distribute any realized income for that reason?
Having studied the prospectus further, you are correct: the fund is required to distribute any realized income at least annually. So I guess they will keep investing the income in box spreads until they need to raise enough cash for the end-of-year distribution. The amount they have to invest can also increase through the acquisition by brokers of "Creation Units" - 10000 shares of BOXX issued to them by the fund in exchange for the corresponding amount of cash.
In that case, for someone using it as an emergency fund, $boxx is superior to the alternatives because you should only get taxed once a year correct?

Assuming you rarely will access the money
texasfight
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by texasfight »

I have buying and selling SGOV to create STCG and offset capital losses in my parents account (sell before ex-div date and buy back after)

Also have heard AQR has private funds that actually generate income losses that can be used to offset ordinary income

It will be fun to watch this one
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by happenstance »

texasfight wrote: Sun Mar 19, 2023 10:27 am I have buying and selling SGOV to create STCG and offset capital losses in my parents account (sell before ex-div date and buy back after)

Also have heard AQR has private funds that actually generate income losses that can be used to offset ordinary income

It will be fun to watch this one
How are you avoiding or handling wash sales when doing that with SGOV?
texasfight
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by texasfight »

happenstance wrote: Sun Mar 19, 2023 10:43 am
texasfight wrote: Sun Mar 19, 2023 10:27 am I have buying and selling SGOV to create STCG and offset capital losses in my parents account (sell before ex-div date and buy back after)

Also have heard AQR has private funds that actually generate income losses that can be used to offset ordinary income

It will be fun to watch this one
How are you avoiding or handling wash sales when doing that with SGOV?
I don't care about wash sales. I am going for STCG instead of income. Buy low, sell high.
ggtt
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by ggtt »

Does anyone know why BOXX holds boxes on BKNG in addition to SPX? I guess it shouldn't matter what they hold the boxes in but weird to see BKNG there.
petulant
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by petulant »

ggtt wrote: Wed May 10, 2023 10:58 am Does anyone know why BOXX holds boxes on BKNG in addition to SPX? I guess it shouldn't matter what they hold the boxes in but weird to see BKNG there.
Per the prospectus linked below:
https://alphaarchitect.com/wp-content/u ... pectus.pdf
Options on the SPX are expected to be the preferred contracts for substantially all of the Fund’s holdings. The Fund may purchase or sell Box Spreads using exchange-listed option contracts on an index other than the SPX or on an individual equity security or exchange traded fund (“ETF”) when the Sub-Adviser has determined that doing so would provide the Fund with better risk and return characteristics.
That means they'll normally use SPX but can use stocks if the numbers look better. BKNG has a beta of 1.33 per Yahoo! Finance, indicating it may be somewhat volatile so that the fund ETF manager would use it when the time value looks better.

For those who wonder why the manager can pick and choose, the prospectus says the ETF is actively managed.

For those who might be concerned that individual options like BKNG would be American-style options, generally a no-no for box spreads, the prospectus says the following:
When purchasing or selling a Box Spread, the Fund will primarily use European-style options, however it may also utilize American-style options.
But not to fear, because in the fine print the prospectus also says they can use normal options or "FLEX" options:
In order to accomplish its investment goals, the Fund may utilize either standard exchange- listed options or FLexible EXchange® Options (“FLEX Options”) or a combination of both.
Per Investopedia, a FLEX option can be negotiated to have either an American or European exercise. https://www.investopedia.com/terms/f/flexoption.asp

So, did they pick up some BKNG standard options, or FLEX options with European exercise? I don't know.
comeinvest
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by comeinvest »

petulant wrote: Wed May 10, 2023 9:17 pm ...
That means they'll normally use SPX but can use stocks if the numbers look better. BKNG has a beta of 1.33 per Yahoo! Finance, indicating it may be somewhat volatile so that the fund ETF manager would use it when the time value looks better.
https://www.investopedia.com/terms/f/flexoption.asp
...
In my understanding the volatility of the underlying is irrelevant for the purpose of box spread valuation. As irrelevant as the current market price, the performance, or anything else of the underlying. Only time to expiration and risk-free rates matter.

I trade box spreads myself. Even if they use FLEX options which I think are privately negotiated but exchange cleared, I'm curious what would be the benefit of using another underlying than SPX.
petulant
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by petulant »

comeinvest wrote: Wed May 10, 2023 10:43 pm
petulant wrote: Wed May 10, 2023 9:17 pm ...
That means they'll normally use SPX but can use stocks if the numbers look better. BKNG has a beta of 1.33 per Yahoo! Finance, indicating it may be somewhat volatile so that the fund ETF manager would use it when the time value looks better.
https://www.investopedia.com/terms/f/flexoption.asp
...
In my understanding the volatility of the underlying is irrelevant for the purpose of box spread valuation. As irrelevant as the current market price, the performance, or anything else of the underlying. Only time to expiration and risk-free rates matter.

I trade box spreads myself. Even if they use FLEX options which I think are privately negotiated but exchange cleared, I'm curious what would be the benefit of using another underlying than SPX.
Maybe I haven't studied it enough. I had the impression the exact return on a box trade differs by the strike prices used on the legs. For really liquid contracts like SPX, the difference is minute. But, it seems like if the underlying is volatile, you might be able to observe situations where the shape of volatility results in prices that give a great deal on some particular leg so that the overall effect might be material if still small, e.g. 5.25 instead of 5.10 or something like that.
comeinvest
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by comeinvest »

petulant wrote: Thu May 11, 2023 5:50 am
comeinvest wrote: Wed May 10, 2023 10:43 pm
petulant wrote: Wed May 10, 2023 9:17 pm ...
That means they'll normally use SPX but can use stocks if the numbers look better. BKNG has a beta of 1.33 per Yahoo! Finance, indicating it may be somewhat volatile so that the fund ETF manager would use it when the time value looks better.
https://www.investopedia.com/terms/f/flexoption.asp
...
In my understanding the volatility of the underlying is irrelevant for the purpose of box spread valuation. As irrelevant as the current market price, the performance, or anything else of the underlying. Only time to expiration and risk-free rates matter.

I trade box spreads myself. Even if they use FLEX options which I think are privately negotiated but exchange cleared, I'm curious what would be the benefit of using another underlying than SPX.
Maybe I haven't studied it enough. I had the impression the exact return on a box trade differs by the strike prices used on the legs. For really liquid contracts like SPX, the difference is minute. But, it seems like if the underlying is volatile, you might be able to observe situations where the shape of volatility results in prices that give a great deal on some particular leg so that the overall effect might be material if still small, e.g. 5.25 instead of 5.10 or something like that.
You are wrong. Box spreads are traded and valued by dealers as a native combination order. If you go to the SPX box spread thread, you will find many real life trading experiences and examples.
adamhg
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by adamhg »

comeinvest wrote: Thu May 11, 2023 11:12 am
petulant wrote: Thu May 11, 2023 5:50 am
comeinvest wrote: Wed May 10, 2023 10:43 pm
petulant wrote: Wed May 10, 2023 9:17 pm ...
That means they'll normally use SPX but can use stocks if the numbers look better. BKNG has a beta of 1.33 per Yahoo! Finance, indicating it may be somewhat volatile so that the fund ETF manager would use it when the time value looks better.
https://www.investopedia.com/terms/f/flexoption.asp
...
In my understanding the volatility of the underlying is irrelevant for the purpose of box spread valuation. As irrelevant as the current market price, the performance, or anything else of the underlying. Only time to expiration and risk-free rates matter.

I trade box spreads myself. Even if they use FLEX options which I think are privately negotiated but exchange cleared, I'm curious what would be the benefit of using another underlying than SPX.
Maybe I haven't studied it enough. I had the impression the exact return on a box trade differs by the strike prices used on the legs. For really liquid contracts like SPX, the difference is minute. But, it seems like if the underlying is volatile, you might be able to observe situations where the shape of volatility results in prices that give a great deal on some particular leg so that the overall effect might be material if still small, e.g. 5.25 instead of 5.10 or something like that.
You are wrong. Box spreads are traded and valued by dealers as a native combination order. If you go to the SPX box spread thread, you will find many real life trading experiences and examples.
Box spreads are priced based on put call parity. For European options, this is straight forward. For American, not so much. They can certainly juice the box spread yield through American options which would then be sensitive to dividend yield, risk free rates, early exercise risk, etc. I remember seeing at the height of the meme stock craze you could get box spreads for pretty juicy returns but people were early exercising for the fun of it. Tech socks also had higher returns and if you're comfortable managing early exercise (really for any spread), you could get better yield than SPX. I'll see if I can dust off my script and find some lube examples of BKNG, but unless they state otherwise my guess is that BOXX is using American to juice higher returns /smh
comeinvest
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by comeinvest »

adamhg wrote: Thu May 11, 2023 11:40 am
comeinvest wrote: Thu May 11, 2023 11:12 am
petulant wrote: Thu May 11, 2023 5:50 am
comeinvest wrote: Wed May 10, 2023 10:43 pm
petulant wrote: Wed May 10, 2023 9:17 pm ...
That means they'll normally use SPX but can use stocks if the numbers look better. BKNG has a beta of 1.33 per Yahoo! Finance, indicating it may be somewhat volatile so that the fund ETF manager would use it when the time value looks better.
https://www.investopedia.com/terms/f/flexoption.asp
...
In my understanding the volatility of the underlying is irrelevant for the purpose of box spread valuation. As irrelevant as the current market price, the performance, or anything else of the underlying. Only time to expiration and risk-free rates matter.

I trade box spreads myself. Even if they use FLEX options which I think are privately negotiated but exchange cleared, I'm curious what would be the benefit of using another underlying than SPX.
Maybe I haven't studied it enough. I had the impression the exact return on a box trade differs by the strike prices used on the legs. For really liquid contracts like SPX, the difference is minute. But, it seems like if the underlying is volatile, you might be able to observe situations where the shape of volatility results in prices that give a great deal on some particular leg so that the overall effect might be material if still small, e.g. 5.25 instead of 5.10 or something like that.
You are wrong. Box spreads are traded and valued by dealers as a native combination order. If you go to the SPX box spread thread, you will find many real life trading experiences and examples.
Box spreads are priced based on put call parity. For European options, this is straight forward. For American, not so much. They can certainly juice the box spread yield through American options which would then be sensitive to dividend yield, risk free rates, early exercise risk, etc. I remember seeing at the height of the meme stock craze you could get box spreads for pretty juicy returns but people were early exercising for the fun of it. Tech socks also had higher returns and if you're comfortable managing early exercise (really for any spread), you could get better yield than SPX. I'll see if I can dust off my script and find some lube examples of BKNG, but unless they state otherwise my guess is that BOXX is using American to juice higher returns /smh
Can you please explain like to a beginner how American box spreads can result in higher implied yields? I once mistakenly sold American futures options box spreads, which had lower yields than corresponding European box spreads. First I was happy, until I realized that some were assigned early, because American FOPs are not always suboptimal to exercise early. My understanding however was that American stock and index options are always suboptimal to exercise early, because they always have remaining time value - which would mean that the box spreads should have the same implied yield as European options, shouldn't they? Please correct me if I'm wrong.
Last edited by comeinvest on Thu May 11, 2023 12:53 pm, edited 1 time in total.
ggtt
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by ggtt »

adamhg wrote: Thu May 11, 2023 11:40 am
comeinvest wrote: Thu May 11, 2023 11:12 am
petulant wrote: Thu May 11, 2023 5:50 am
comeinvest wrote: Wed May 10, 2023 10:43 pm
petulant wrote: Wed May 10, 2023 9:17 pm ...
That means they'll normally use SPX but can use stocks if the numbers look better. BKNG has a beta of 1.33 per Yahoo! Finance, indicating it may be somewhat volatile so that the fund ETF manager would use it when the time value looks better.
https://www.investopedia.com/terms/f/flexoption.asp
...
In my understanding the volatility of the underlying is irrelevant for the purpose of box spread valuation. As irrelevant as the current market price, the performance, or anything else of the underlying. Only time to expiration and risk-free rates matter.

I trade box spreads myself. Even if they use FLEX options which I think are privately negotiated but exchange cleared, I'm curious what would be the benefit of using another underlying than SPX.
Maybe I haven't studied it enough. I had the impression the exact return on a box trade differs by the strike prices used on the legs. For really liquid contracts like SPX, the difference is minute. But, it seems like if the underlying is volatile, you might be able to observe situations where the shape of volatility results in prices that give a great deal on some particular leg so that the overall effect might be material if still small, e.g. 5.25 instead of 5.10 or something like that.
You are wrong. Box spreads are traded and valued by dealers as a native combination order. If you go to the SPX box spread thread, you will find many real life trading experiences and examples.
Box spreads are priced based on put call parity. For European options, this is straight forward. For American, not so much. They can certainly juice the box spread yield through American options which would then be sensitive to dividend yield, risk free rates, early exercise risk, etc. I remember seeing at the height of the meme stock craze you could get box spreads for pretty juicy returns but people were early exercising for the fun of it. Tech socks also had higher returns and if you're comfortable managing early exercise (really for any spread), you could get better yield than SPX. I'll see if I can dust off my script and find some lube examples of BKNG, but unless they state otherwise my guess is that BOXX is using American to juice higher returns /smh
That would be disappointing since I don't think anyone here is interested in handicapping the managers ability to deal with esoteric risks around early exercise and the BKNG dividend/borrow rate. Also it would go against the spirit of how the fund is marketed because they say the fund seeks to have a similar risk profile to treasury bills.
ggtt
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by ggtt »

comeinvest wrote: Thu May 11, 2023 12:34 pm
adamhg wrote: Thu May 11, 2023 11:40 am
comeinvest wrote: Thu May 11, 2023 11:12 am
petulant wrote: Thu May 11, 2023 5:50 am
comeinvest wrote: Wed May 10, 2023 10:43 pm

In my understanding the volatility of the underlying is irrelevant for the purpose of box spread valuation. As irrelevant as the current market price, the performance, or anything else of the underlying. Only time to expiration and risk-free rates matter.

I trade box spreads myself. Even if they use FLEX options which I think are privately negotiated but exchange cleared, I'm curious what would be the benefit of using another underlying than SPX.
Maybe I haven't studied it enough. I had the impression the exact return on a box trade differs by the strike prices used on the legs. For really liquid contracts like SPX, the difference is minute. But, it seems like if the underlying is volatile, you might be able to observe situations where the shape of volatility results in prices that give a great deal on some particular leg so that the overall effect might be material if still small, e.g. 5.25 instead of 5.10 or something like that.
You are wrong. Box spreads are traded and valued by dealers as a native combination order. If you go to the SPX box spread thread, you will find many real life trading experiences and examples.
Box spreads are priced based on put call parity. For European options, this is straight forward. For American, not so much. They can certainly juice the box spread yield through American options which would then be sensitive to dividend yield, risk free rates, early exercise risk, etc. I remember seeing at the height of the meme stock craze you could get box spreads for pretty juicy returns but people were early exercising for the fun of it. Tech socks also had higher returns and if you're comfortable managing early exercise (really for any spread), you could get better yield than SPX. I'll see if I can dust off my script and find some lube examples of BKNG, but unless they state otherwise my guess is that BOXX is using American to juice higher returns /smh
Can you explain like to a beginner how American box spreads can result in higher implied yields? I once mistakenly sold American futures options box spreads, which had lower yields than corresponding European box spreads. First I was happy, until I realized that some were assigned early, because American FOPs are not always suboptimal to exercise early. My understanding however was that American stock and index options are always suboptimal to exercise early, because they always have remaining time value - which would mean that the box spreads should have the same implied yield as European options, shouldn't they? Please correct me if I'm wrong.
There are a variety of scenarios where you'd want to exercise an American option early but one simple example is a dividend payment. Say you have an in-the-money call option close to expiration and the stock is paying a dividend right before the expiration date. In this case you may want to exercise early so you can collect the dividend.
comeinvest
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by comeinvest »

ggtt wrote: Thu May 11, 2023 12:40 pm
comeinvest wrote: Thu May 11, 2023 12:34 pm Can you explain like to a beginner how American box spreads can result in higher implied yields? I once mistakenly sold American futures options box spreads, which had lower yields than corresponding European box spreads. First I was happy, until I realized that some were assigned early, because American FOPs are not always suboptimal to exercise early. My understanding however was that American stock and index options are always suboptimal to exercise early, because they always have remaining time value - which would mean that the box spreads should have the same implied yield as European options, shouldn't they? Please correct me if I'm wrong.
There are a variety of scenarios where you'd want to exercise an American option early but one simple example is a dividend payment. Say you have an in-the-money call option close to expiration and the stock is paying a dividend right before the expiration date. In this case you may want to exercise early so you can collect the dividend.
Yes I hear that is one of the few exceptions, or perhaps the only exception. But I doubt that this is related to why BOXX uses rather esoteric stock options instead of index options.
ggtt
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by ggtt »

comeinvest wrote: Thu May 11, 2023 12:55 pm
ggtt wrote: Thu May 11, 2023 12:40 pm
comeinvest wrote: Thu May 11, 2023 12:34 pm Can you explain like to a beginner how American box spreads can result in higher implied yields? I once mistakenly sold American futures options box spreads, which had lower yields than corresponding European box spreads. First I was happy, until I realized that some were assigned early, because American FOPs are not always suboptimal to exercise early. My understanding however was that American stock and index options are always suboptimal to exercise early, because they always have remaining time value - which would mean that the box spreads should have the same implied yield as European options, shouldn't they? Please correct me if I'm wrong.
There are a variety of scenarios where you'd want to exercise an American option early but one simple example is a dividend payment. Say you have an in-the-money call option close to expiration and the stock is paying a dividend right before the expiration date. In this case you may want to exercise early so you can collect the dividend.
Yes I hear that is one of the few exceptions, or perhaps the only exception. But I doubt that this is related to why BOXX uses rather esoteric stock options instead of index options.
Agree, I was just trying to given an example of how other variables can outweigh the time value of the option. But I am still confused about why BKNG is in the fund.
adamhg
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by adamhg »

Here's my script with the best bid/ask for box spreads at each tenor.

BKNG
Image

SPX
Image

If we're comparing against long box spreads < 3mo out that'd be the ask rates for first few row in each picture. Nothing really is obviously better. SPX is nice and clean, but BKNG spreads are really wide, and the data gets really noisy the closer to expiry. Mid-point rate might give _some_ indication, but no guarantee its real. It's also higher on some but lower on others

Why might it make sense then? Super volatile stocks where option prices are really needed to hedge a direction. I also seem to remember that puts are typically more expensive than calls, but I can't source that claim. If so, then you might be able to at least imagine there can be some inefficiencies to pull out of the noise if you're willing to take the risk.

Here's a much more clear cut example with everybody's favorite meme stock

GME
Image

Asks don't make sense of course, but check out the bid. You can _short_ that 4/19/24 box and get $17.30 today and pay back $17 in the future based on the bid ask! That's a negative rate, free money to borrow money today, but only if you're comfortable selling $3 calls and $20 puts on GME.

If we're being generous, maybe BKNG had some pricing irregularly and where the risk of early assignment could be managed and BOXX took advantage. So hard to say without trade dates.
ggtt
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by ggtt »

I think the GME box is a good example of how early exercise affects American boxes. The borrow rate is so high for GME that the $3 call is probably an instant exercise (because exercising the call now allows the holder to collect enormous GME borrow fees), so someone looking at it from the perspective of European options would think the trade is:

Short synthetic GME at $3 settling in April
Long synthetic GME at $20 settling in April

but really what you end up getting is

Short GME stock now
Long synthetic GME at $20

plus you own an April $3 put for good measure. But the point is you're stuck paying the borrow on GME for the next year which is probably costly enough to make crossing the bid/ask spread bad.

That said, if I'm reading the BOXX holdings correctly they are trading the $100/$110 BKNG box with the price of BKNG around $2650 so none of these one sided exercise situations seem in play. Also those strikes aren't even listed so they must be doing a bespoke OTC trade.

Also wouldn't doing this with BKNG ruin the 60/40 tax treatment the fund is supposed to get?
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by whodidntante »

ggtt wrote: Thu May 11, 2023 3:40 pm Also wouldn't doing this with BKNG ruin the 60/40 tax treatment the fund is supposed to get?
I think you're making a wild assumption that the fund will distribute 60/40 cap gains. My wild assumption is that the fund will not distribute anything at all, or at least that it is built to minimize distributions. We will see who is right. Place bets now.
comeinvest
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by comeinvest »

whodidntante wrote: Thu May 11, 2023 3:49 pm
ggtt wrote: Thu May 11, 2023 3:40 pm Also wouldn't doing this with BKNG ruin the 60/40 tax treatment the fund is supposed to get?
I think you're making a wild assumption that the fund will distribute 60/40 cap gains. My wild assumption is that the fund will not distribute anything at all, or at least that it is built to minimize distributions. We will see who is right. Place bets now.
ETFs have to distribute realized capital gains by law or not? Otherwise it would be a tax shelter which ETFs are not.
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by whodidntante »

comeinvest wrote: Thu May 11, 2023 9:03 pm
whodidntante wrote: Thu May 11, 2023 3:49 pm
ggtt wrote: Thu May 11, 2023 3:40 pm Also wouldn't doing this with BKNG ruin the 60/40 tax treatment the fund is supposed to get?
I think you're making a wild assumption that the fund will distribute 60/40 cap gains. My wild assumption is that the fund will not distribute anything at all, or at least that it is built to minimize distributions. We will see who is right. Place bets now.
ETFs have to distribute realized capital gains by law or not? Otherwise it would be a tax shelter which ETFs are not.
Sure. Absolutely no way to defer capital gains. Unless there is.

I love you all. Even those of you who work for the SEC.
midnightrun
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by midnightrun »

Is this a reasonable option to park cash that may be need in the next 4-8 weeks if worried about hiccups due to debt limit drama? Any downside?
petulant
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by petulant »

comeinvest wrote: Thu May 11, 2023 9:03 pm
whodidntante wrote: Thu May 11, 2023 3:49 pm
ggtt wrote: Thu May 11, 2023 3:40 pm Also wouldn't doing this with BKNG ruin the 60/40 tax treatment the fund is supposed to get?
I think you're making a wild assumption that the fund will distribute 60/40 cap gains. My wild assumption is that the fund will not distribute anything at all, or at least that it is built to minimize distributions. We will see who is right. Place bets now.
ETFs have to distribute realized capital gains by law or not? Otherwise it would be a tax shelter which ETFs are not.
https://www.investopedia.com/how-heartb ... ns-4684138

(I still wonder aloud if Section 1258 converts all of the appreciation to ordinary income.)
InvestLikeMike
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by InvestLikeMike »

Hi All, just created a Bogleheads account to help solve the mystery of the Booking.com options.

These are indeed European Flex options. I searched the web for "230818C00100010" hoping it might lead somewhere, and it took me to the Master Intraday Options file at the FINRA CAT website: https://catnmsplan.com/reference-data

If you open the Intraday options file, you'll see our mystery options listed as follows:
FLEX|2BKNG 230818C00100010|BKNG|E|PM|N
FLEX|2BKNG 230818C00110010|BKNG|E|PM|N
FLEX|2BKNG 230818P00100010|BKNG|E|PM|N
FLEX|2BKNG 230818P00110010|BKNG|E|PM|N
The "E" indicates European exercise (and the "FLEX" confirms these are Flex options.)

Who took the other side of these exceptionally deep in the money call and deep out of the money put trades? Great question -- probably filling some risk management need for someone with a big position on Booking.com. But the Flex options have the same counterparty risk of the OCC as any other options, so this makes me feel better about them being in the mix here.
Last edited by InvestLikeMike on Fri May 12, 2023 7:05 am, edited 1 time in total.
comeinvest
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by comeinvest »

petulant wrote: Fri May 12, 2023 6:53 am
comeinvest wrote: Thu May 11, 2023 9:03 pm
whodidntante wrote: Thu May 11, 2023 3:49 pm
ggtt wrote: Thu May 11, 2023 3:40 pm Also wouldn't doing this with BKNG ruin the 60/40 tax treatment the fund is supposed to get?
I think you're making a wild assumption that the fund will distribute 60/40 cap gains. My wild assumption is that the fund will not distribute anything at all, or at least that it is built to minimize distributions. We will see who is right. Place bets now.
ETFs have to distribute realized capital gains by law or not? Otherwise it would be a tax shelter which ETFs are not.
https://www.investopedia.com/how-heartb ... ns-4684138

(I still wonder aloud if Section 1258 converts all of the appreciation to ordinary income.)
I don't understand how heartbeat trades work, and how the remaining pool of investors in the fund other than the banks redeeming shares in-kind would benefit from this.
comeinvest
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by comeinvest »

InvestLikeMike wrote: Fri May 12, 2023 7:02 am Hi All, just created a Bogleheads account to help solve the mystery of the Booking.com options.

These are indeed European Flex options. I searched the web for "230818C00100010" hoping it might lead somewhere, and it took me to the Master Intraday Options file at the FINRA CAT website: https://catnmsplan.com/reference-data

If you open the Intraday options file, you'll see our mystery options listed as follows:
FLEX|2BKNG 230818C00100010|BKNG|E|PM|N
FLEX|2BKNG 230818C00110010|BKNG|E|PM|N
FLEX|2BKNG 230818P00100010|BKNG|E|PM|N
FLEX|2BKNG 230818P00110010|BKNG|E|PM|N
The "E" indicates European exercise (and the "FLEX" confirms these are Flex options.)

Who took the other side of these exceptionally deep in the money call and deep out of the money put trades? Great question -- probably filling some risk management need for someone with a big position on Booking.com. But the Flex options have the same counterparty risk of the OCC as any other options, so this makes me feel better about them being in the mix here.
I'm not sure if that has anything to do with BOXX, and how they would generate income higher than what they could generate with SPX box spread options and why. But how do you read the numbers after the "C" or "P", presumably indicating the strike price?
Walkure
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Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by Walkure »

comeinvest wrote: Fri May 12, 2023 9:25 am
InvestLikeMike wrote: Fri May 12, 2023 7:02 am Hi All, just created a Bogleheads account to help solve the mystery of the Booking.com options.

These are indeed European Flex options. I searched the web for "230818C00100010" hoping it might lead somewhere, and it took me to the Master Intraday Options file at the FINRA CAT website: https://catnmsplan.com/reference-data

If you open the Intraday options file, you'll see our mystery options listed as follows:
FLEX|2BKNG 230818C00100010|BKNG|E|PM|N
FLEX|2BKNG 230818C00110010|BKNG|E|PM|N
FLEX|2BKNG 230818P00100010|BKNG|E|PM|N
FLEX|2BKNG 230818P00110010|BKNG|E|PM|N
The "E" indicates European exercise (and the "FLEX" confirms these are Flex options.)

Who took the other side of these exceptionally deep in the money call and deep out of the money put trades? Great question -- probably filling some risk management need for someone with a big position on Booking.com. But the Flex options have the same counterparty risk of the OCC as any other options, so this makes me feel better about them being in the mix here.
I'm not sure if that has anything to do with BOXX, and how they would generate income higher than what they could generate with SPX box spread options and why. But how do you read the numbers after the "C" or "P", presumably indicating the strike price?
Those are Calls and Puts. They are the offsetting four legs of the box. If you don't know that you probably should not be anywhere near a Box Spread, ETF notwithstanding.
petulant
Posts: 3601
Joined: Thu Sep 22, 2016 1:09 pm

Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by petulant »

comeinvest wrote: Fri May 12, 2023 9:16 am
petulant wrote: Fri May 12, 2023 6:53 am
comeinvest wrote: Thu May 11, 2023 9:03 pm
whodidntante wrote: Thu May 11, 2023 3:49 pm
ggtt wrote: Thu May 11, 2023 3:40 pm Also wouldn't doing this with BKNG ruin the 60/40 tax treatment the fund is supposed to get?
I think you're making a wild assumption that the fund will distribute 60/40 cap gains. My wild assumption is that the fund will not distribute anything at all, or at least that it is built to minimize distributions. We will see who is right. Place bets now.
ETFs have to distribute realized capital gains by law or not? Otherwise it would be a tax shelter which ETFs are not.
https://www.investopedia.com/how-heartb ... ns-4684138

(I still wonder aloud if Section 1258 converts all of the appreciation to ordinary income.)
I don't understand how heartbeat trades work, and how the remaining pool of investors in the fund other than the banks redeeming shares in-kind would benefit from this.
A basic heartbeat trade for BOXX might look like the following. I am making assumptions about the tax position BOXX would take, not necessarily agreeing with those positions.

1. BOXX buys a box spread for $97.
2. The box spread appreciates to $99.83 as it approaches expiration.
3. BOXX exchanges the box spread for shares worth $99.83 in a transaction with an AP. This is not a taxable sale. BOXX has less assets but also less shares, so the existing shareholders are no worse off. The AP is now holding the appreciated box spread and presumably has some other mechanism to handle the unrealized gain favorably.
4. The same or a different AP exchanges $99.83 in new box spreads to BOXX in exchange for shares worth $99.83. This might be 1.029 new box spreads that cost $97 each. Alternatively, perhaps the AP can just give BOXX $99.83 in cash, which BOX immediately uses to buy box spreads worth $99.83. Either way, it is not a taxable event. BOXX now has the same number of shares, the same fair market value of assets, but its unrealized gain has disappeared.
5. If BOXX repeats steps 1-4 often enough during the year, its shares will appreciate from the economic return of the box spreads, yet it will not distribute any capital gains.
comeinvest
Posts: 2617
Joined: Mon Mar 12, 2012 6:57 pm

Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by comeinvest »

Walkure wrote: Fri May 12, 2023 10:01 am
comeinvest wrote: Fri May 12, 2023 9:25 am
InvestLikeMike wrote: Fri May 12, 2023 7:02 am Hi All, just created a Bogleheads account to help solve the mystery of the Booking.com options.

These are indeed European Flex options. I searched the web for "230818C00100010" hoping it might lead somewhere, and it took me to the Master Intraday Options file at the FINRA CAT website: https://catnmsplan.com/reference-data

If you open the Intraday options file, you'll see our mystery options listed as follows:
FLEX|2BKNG 230818C00100010|BKNG|E|PM|N
FLEX|2BKNG 230818C00110010|BKNG|E|PM|N
FLEX|2BKNG 230818P00100010|BKNG|E|PM|N
FLEX|2BKNG 230818P00110010|BKNG|E|PM|N
The "E" indicates European exercise (and the "FLEX" confirms these are Flex options.)

Who took the other side of these exceptionally deep in the money call and deep out of the money put trades? Great question -- probably filling some risk management need for someone with a big position on Booking.com. But the Flex options have the same counterparty risk of the OCC as any other options, so this makes me feel better about them being in the mix here.
I'm not sure if that has anything to do with BOXX, and how they would generate income higher than what they could generate with SPX box spread options and why. But how do you read the numbers after the "C" or "P", presumably indicating the strike price?
Those are Calls and Puts. They are the offsetting four legs of the box. If you don't know that you probably should not be anywhere near a Box Spread, ETF notwithstanding.
You didn't answer my simple question; instead you are questioning the suitability of box spreads for my level of education, an opinion I didn't solicit from you.
Last edited by comeinvest on Fri May 12, 2023 12:34 pm, edited 2 times in total.
InvestLikeMike
Posts: 2
Joined: Fri May 12, 2023 6:47 am

Re: AlphaArchitect launches BOXX: 1-3 Month Box Spread ETF

Post by InvestLikeMike »

comeinvest wrote: Fri May 12, 2023 9:25 am
InvestLikeMike wrote: Fri May 12, 2023 7:02 am Hi All, just created a Bogleheads account to help solve the mystery of the Booking.com options.

These are indeed European Flex options. I searched the web for "230818C00100010" hoping it might lead somewhere, and it took me to the Master Intraday Options file at the FINRA CAT website: https://catnmsplan.com/reference-data

If you open the Intraday options file, you'll see our mystery options listed as follows:
FLEX|2BKNG 230818C00100010|BKNG|E|PM|N
FLEX|2BKNG 230818C00110010|BKNG|E|PM|N
FLEX|2BKNG 230818P00100010|BKNG|E|PM|N
FLEX|2BKNG 230818P00110010|BKNG|E|PM|N
The "E" indicates European exercise (and the "FLEX" confirms these are Flex options.)

Who took the other side of these exceptionally deep in the money call and deep out of the money put trades? Great question -- probably filling some risk management need for someone with a big position on Booking.com. But the Flex options have the same counterparty risk of the OCC as any other options, so this makes me feel better about them being in the mix here.
I'm not sure if that has anything to do with BOXX, and how they would generate income higher than what they could generate with SPX box spread options and why. But how do you read the numbers after the "C" or "P", presumably indicating the strike price?
Check the holdings for BOXX on their website. Among numerous SPX box spreads, they also currently have a box spread open on BKNG, which is permitted in the Prospectus as noted above. if the BKNG options were American options, it could be problematic as there could be a (small) risk of early exercise of the deep ITM short call for a variety of reasons. So the confirmation that it is a European-style Flex option is useful to know here.
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