Box Spreads as Loans - Interactive Brokers IBKR - 2021

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
mutedbytes
Posts: 20
Joined: Mon Mar 15, 2021 1:55 am

Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by mutedbytes »

firebirdparts wrote: Thu Jun 24, 2021 3:50 pm
mutedbytes wrote: Wed Jun 23, 2021 5:38 pm A random thought... would a short box spread with portfolio margin allow one to convert otherwise unfavorable loans for more favorable termed leveraged investing? More thought experiment than actual consideration of employing such a crazy scheme but suppose for a young lifecycle investor:

1) Borrow X amount at some unfavorable rate from external lender (personal loan, HELOC, whatever)
2) Deposit and invest with access to portfolio margin
3) Short box with exceptional rate
4) Withdraw cash to immediately repay external loan

Mechanically, does this work? Where does this break down (besides the inherent risk of borrowing to invest and maintenance of the scheme etc etc)?
It would work, but you don't need to, I don't think. What this thread is about is you just omit step 1, 2, and 4. The end result, with you having whatever, $50,000 in cash in your brokerage account, to invest in whatever you like, is the same.

If you need to because of some form of margin requirements, then sure, you could do it.
The idea is that this hypothetical young investor has $0 capital available outside of tax-advantaged space, and thus requires the initial steps to even open the position. The question is if this provides a mechanism to convert interest rate of otherwise external funding sources, but maybe as Raraculus has noted the limitation may be the premium withdrawal or buying power/margin effect being a no-go. But it would be interesting to know.
mutedbytes
Posts: 20
Joined: Mon Mar 15, 2021 1:55 am

Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by mutedbytes »

firebirdparts wrote: Thu Jun 24, 2021 3:55 pm By the way, I got early assigned this morning. I would never borrow money, but I had a covered call that was assigned today. It does happen. It didn't appear to be a wise thing to do for the person who did it. Maybe I don't understand what they wanted to do.

I can see where, on these long dated options, they are not as liquid as you might like. Maybe once in a while somebody just executes one because it's not selling for the price it should.
I would think this should only ever be considered with European style options, such as those on ^SPX or ^XSP. Specifically to eliminate assignment risk.
gougou
Posts: 425
Joined: Thu Sep 28, 2017 7:42 pm

Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by gougou »

I recently got the box spread of 2300, 5600 Jan 19, 2023 filled at around 3270, so about 0.92% interest rate over ~1.5 years. Looks like a good deal to me. Hopefully it never gets auto-liquidated :D
comeinvest
Posts: 377
Joined: Mon Mar 12, 2012 6:57 pm

Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by comeinvest »

gougou wrote: Thu Jun 24, 2021 4:40 pm I recently got the box spread of 2300, 5600 Jan 19, 2023 filled at around 3270, so about 0.92% interest rate over ~1.5 years. Looks like a good deal to me. Hopefully it never gets auto-liquidated :D
How did you calculate the 0.92% ? I calculate about 0.58% interest rate for your box spread.
gougou
Posts: 425
Joined: Thu Sep 28, 2017 7:42 pm

Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by gougou »

comeinvest wrote: Sun Jun 27, 2021 7:06 pm
gougou wrote: Thu Jun 24, 2021 4:40 pm I recently got the box spread of 2300, 5600 Jan 19, 2023 filled at around 3270, so about 0.92% interest rate over ~1.5 years. Looks like a good deal to me. Hopefully it never gets auto-liquidated :D
How did you calculate the 0.92% ? I calculate about 0.58% interest rate for your box spread.
Yeah so it's 0.92% interest over a little over 1.5 years which comes to about 0.6% APR.
moneytree
Posts: 2
Joined: Thu Mar 07, 2019 9:10 am

Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by moneytree »

I've been playing around with SPX box spreads, and I get better pricing with BUYING a 2000-1000 (reverse) box compared to SELLING a 1000-2000 box. The net result is the same, but I guess I just don't understand the mechanics of why this happens.

If we are assuming that HFTs or market makers are using algos to swoop up boxes at a certain rate (risk-free rate + whatever premium they like) I'm not sure why they don't scoop up both sides of the trade at the same effective rate.


Example:

I was able to buy a Dec14'23 2000-1000 SPX box at -990.
Yield = (1000-990)/990 = 1.01% over 2.45 years
APY = 0.41% (wow!)

But during the same trading session, I cannot get anyone to fill an order to sell a Dec14'23 1000-2000 SPX box even at 975 (order sat for 3+ hours without filling), which implies an APY of 1.04%.

:?: :?
Enlighten me?

EDIT:
Is this phenomenon already known? I see a Redditor that is buying reverse boxes for her box trades.
See: https://preview.redd.it/vo0rrch4sz961.p ... 655ed202bd

EDIT 2:
I further experimented by simultaneously setting up orders to both BUY a 4000-3000 box and SELL a 3000-4000 box with both orders priced at 980. Both filled about 30 seconds apart, but notably the reverse box filled first. Interesting.

Code: Select all

16:15:47 SPX Dec14'23 3000 - 4000 Box SLD 1 980.00 CBOE X 6.03
16:15:18 SPX Dec14'23 4000 - 3000 Box BOT 1 -980.00 CBOE X 6.03
Last edited by moneytree on Thu Jul 01, 2021 2:01 pm, edited 2 times in total.
mutedbytes
Posts: 20
Joined: Mon Mar 15, 2021 1:55 am

Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by mutedbytes »

moneytree wrote: Thu Jul 01, 2021 1:32 pm I've been playing around with SPX box spreads, and I get better pricing with BUYING a 2000-1000 (reverse) box compared to SELLING a 1000-2000 box. The net result is the same, but I guess I just don't understand the mechanics of why this happens.

If we are assuming that HFTs or market makers are using algos to swoop up boxes at a certain rate (risk-free rate + whatever premium they like) I'm not sure why they don't scoop up both sides of the trade at the same effective rate.


Example:

I was able to buy a Dec14'23 2000-1000 SPX box at -990.
Yield = (1000-990)/990 = 1.01% over 2.45 years
APY = 0.41% (wow!)

But during the same trading session, I cannot get anyone to fill an order to sell a Dec14'23 1000-2000 SPX box even at 975 (order sat for 3+ hours without filling), which implies an APY of 1.04%.

:?: :?
Enlighten me?

EDIT:
Is this phenomenon already known? I see a Redditor that is buying reverse boxes for her box trades.
See: https://preview.redd.it/vo0rrch4sz961.p ... 655ed202bd

EDIT 2:
I further experimented by simultaneously setting up orders to both BUY a 4000-3000 box and SELL a 3000-4000 box with both orders priced at 980. Both filled about 30 seconds apart, but notably the reverse box filled first. Interesting.

Code: Select all

16:15:47 SPX Dec14'23 3000 - 4000 Box SLD 1 980.00 CBOE X 6.03
16:15:18 SPX Dec14'23 4000 - 3000 Box BOT 1 -980.00 CBOE X 6.03
It is not clear to me what the difference between these transactions actually are. Is this perhaps something specific to your brokerage or software?

If I think of being short a box spread, it is:
Short lower strike call
Long higher strike call
Long lower strike put
Short higher strike put

What does it mean to long the "reverse" spread? How do the individual components differ?
comeinvest
Posts: 377
Joined: Mon Mar 12, 2012 6:57 pm

Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by comeinvest »

moneytree wrote: Thu Jul 01, 2021 1:32 pm I've been playing around with SPX box spreads, and I get better pricing with BUYING a 2000-1000 (reverse) box compared to SELLING a 1000-2000 box. The net result is the same, but I guess I just don't understand the mechanics of why this happens.

If we are assuming that HFTs or market makers are using algos to swoop up boxes at a certain rate (risk-free rate + whatever premium they like) I'm not sure why they don't scoop up both sides of the trade at the same effective rate.


Example:

I was able to buy a Dec14'23 2000-1000 SPX box at -990.
Yield = (1000-990)/990 = 1.01% over 2.45 years
APY = 0.41% (wow!)

But during the same trading session, I cannot get anyone to fill an order to sell a Dec14'23 1000-2000 SPX box even at 975 (order sat for 3+ hours without filling), which implies an APY of 1.04%.

:?: :?
Enlighten me?

EDIT:
Is this phenomenon already known? I see a Redditor that is buying reverse boxes for her box trades.
See: https://preview.redd.it/vo0rrch4sz961.p ... 655ed202bd

EDIT 2:
I further experimented by simultaneously setting up orders to both BUY a 4000-3000 box and SELL a 3000-4000 box with both orders priced at 980. Both filled about 30 seconds apart, but notably the reverse box filled first. Interesting.

Code: Select all

16:15:47 SPX Dec14'23 3000 - 4000 Box SLD 1 980.00 CBOE X 6.03
16:15:18 SPX Dec14'23 4000 - 3000 Box BOT 1 -980.00 CBOE X 6.03
I'm not an options professional, but I would bet that the box (sell order) and the reverse box (buy order) are not distinguishable at the CBOE. Both consist of 100% the exact same 4 legs, and the 4 legs define the combination order. I'm happy to stand corrected. What broker did you use?

My boxes are all filled at between 0.4% an 0.6% APY. I doubt that your 1.04% box got transmitted to the exchange.

On another note, almost all my boxes are filled either immediately or never. In order words, setting a higher limit for selling the box, and "patiently" waiting, almost never results in a fill. When I lower my limit using minimum decrements, at some point they are filled immediately. Instead of wasting my time, I now usually just put in a limit significantly below the price that I expect to get filled, and I always got filled much higher than my limits, at APYs similar to those that I get when I decrement the limits slowly. I conclude that the bots are programmed to look for and to fill boxes above a certain implied interest rate. I think the CBOE also implements 100 millisecond electronic auction (COA) for incoming complex orders: https://www.cboe.com/us/options/trading/complex_orders/
I don't know what the risk of my procedure is.

I'm curious how the complex limit order book can be viewed. I still didn't figure out that one. The spread on boxes seems to be huge. (By spread I mean the spread between the prices at which buy and sell orders actually get filled, not the quoted prices.) I think it's not currently possible to *buy* a spread at positive interest rates. Did anyone try? Theoretically I should be able to look for resting box limit orders of market participants other than market makers, to eliminate the spread.
moneytree
Posts: 2
Joined: Thu Mar 07, 2019 9:10 am

Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by moneytree »

mutedbytes wrote: Fri Jul 02, 2021 12:57 am It is not clear to me what the difference between these transactions actually are. Is this perhaps something specific to your brokerage or software?

If I think of being short a box spread, it is:
Short lower strike call
Long higher strike call
Long lower strike put
Short higher strike put

What does it mean to long the "reverse" spread? How do the individual components differ?
I use IBKR's TWS for trades.
I think long the reverse box is synthetically equivalent to shorting the box. Regarding the components, if you flip the short/long legs on your example, then BUY that box, that is what I refer to when I am buying the "reverse" box. I'm just calling it "reverse", but there may be better and more correct terminology for what I am describing.

Example for BUY SPX Dec14'23 4000 - 3000 Box, TWS says:

BUY 1 Combo
Buy 1 SPX Dec14'23 3000 CALL
Sell 1 SPX Dec14'23 4000 CALL
Sell 1 SPX Dec14'23 3000 PUT
Buy 1 SPX Dec14'23 4000 PUT
Order Type LMT Routing SMART Time in Force DAY
Limit Price -980.00 CREDIT


comeinvest wrote: Fri Jul 02, 2021 3:36 am I'm not an options professional, but I would bet that the box (sell order) and the reverse box (buy order) are not distinguishable at the CBOE. Both consist of 100% the exact same 4 legs, and the 4 legs define the combination order. I'm happy to stand corrected. What broker did you use?

My boxes are all filled at between 0.4% an 0.6% APY. I doubt that your 1.04% box got transmitted to the exchange.

On another note, almost all my boxes are filled either immediately or never. In order words, setting a higher limit for selling the box, and "patiently" waiting, almost never results in a fill. When I lower my limit using minimum decrements, at some point they are filled immediately. Instead of wasting my time, I now usually just put in a limit significantly below the price that I expect to get filled, and I always got filled much higher than my limits, at APYs similar to those that I get when I decrement the limits slowly. I conclude that the bots are programmed to look for and to fill boxes above a certain implied interest rate. I think the CBOE also implements 100 millisecond electronic auction (COA) for incoming complex orders: https://www.cboe.com/us/options/trading/complex_orders/
I don't know what the risk of my procedure is.

I'm curious how the complex limit order book can be viewed. I still didn't figure out that one. The spread on boxes seems to be huge. (By spread I mean the spread between the prices at which buy and sell orders actually get filled, not the quoted prices.) I think it's not currently possible to *buy* a spread at positive interest rates. Did anyone try? Theoretically I should be able to look for resting box limit orders of market participants other than market makers, to eliminate the spread.
I use IBKR. Thank you for the reminder regarding exchange, I had SMART routing enabled in TWS and will try to route everything through CBOE instead.

I had the same observation as you regarding box fills. I also seem to get quick fills (2 min or less) or the orders just sit. I worry about using your strategy of using low limits due to the wide bid/ask spread. You may be rewarding a quicker HFT when what we really want is good loan terms and a low rate, which may be provided by a slower trader. IBKR's TWS has a feature called ScaleTrader, which you can use to automate stepping down the price until achieving a fill.

I also did not figure out how to look into the order book for a box spread. TWS does appear to at least show the top of the book with the quoted bid/ask spread. I've been aiming above the midpoint and working down when putting in orders. Sometimes looking at the book for the individual option legs is helpful to get an idea of demand.

When you refer to buying a box spread with positive interest rates, are you referring to becoming the lender?
Ex. Buy 1000-2000 box at 1100? Not sure why a retail investor would want to do this. You can probably find better with a FDIC-insured savings.
Last edited by moneytree on Fri Jul 02, 2021 10:54 am, edited 1 time in total.
User avatar
firebirdparts
Posts: 2691
Joined: Thu Jun 13, 2019 4:21 pm

Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by firebirdparts »

I'm afraid my language and comprehension skills are not good enough to comment here. A box spread is two synthetic stock positions. If you reverse the long and short synthetic stock strike prices, then you would own the higher priced one. You become the lender.

Anyway, even if somebody explains it, I don't really have any idea how that looks to the market makers.
A fool and your money are soon partners
comeinvest
Posts: 377
Joined: Mon Mar 12, 2012 6:57 pm

Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by comeinvest »

moneytree wrote: Fri Jul 02, 2021 10:08 am I also did not figure out how to look into the order book for a box spread. TWS does appear to at least show the top of the book with the quoted bid/ask spread. I've been aiming above the midpoint and working down when putting in orders. Sometimes looking at the book for the individual option legs is helpful to get an idea of demand.

When you refer to buying a box spread with positive interest rates, are you referring to becoming the lender?
Ex. Buy 1000-2000 box at 1100? Not sure why a retail investor would want to do this. You can probably find better with a FDIC-insured savings.
I think even the indicated bid/ask for the box is not the top of the book for the box, but simply the "indicative" quote which is the sum of the quotes of the individual legs. That's what they show for futures calendar roll spreads, and I suspect it's the same for options. For futures calendar roll spreads, you don't get to see actual dealer or other quotes for the calendar roll spreads (which are typically tighter than the sum of the quotes of the legs), for whatever reason that I have not figured out yet.

Even if it were to show the top of the actual combination order book, due to the large number of combinations of expirations and strike prices it would be nearly impossible to find attractive opposing box orders, unless you can directly view the complex order book.

Regarding your second question. Yes, becoming a lender. It would be attractive if the bid/ask spreads for boxes were tighter, or we could view the complex order book and eliminate the market maker. For example, you want to sell a box for leverage. I have some leftover cash that I need to park for some time. I see your limit order, and we can transact close to the mid price.
Chuck
Posts: 2199
Joined: Thu May 21, 2009 12:19 pm

Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by Chuck »

comeinvest wrote: Fri Jul 02, 2021 3:19 pm For example, you want to sell a box for leverage. I have some leftover cash that I need to park for some time. I see your limit order, and we can transact close to the mid price.
In that case, just start a thread and see if someone takes the other side of the trade. :)
comeinvest
Posts: 377
Joined: Mon Mar 12, 2012 6:57 pm

Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by comeinvest »

Chuck wrote: Fri Jul 02, 2021 3:49 pm
comeinvest wrote: Fri Jul 02, 2021 3:19 pm For example, you want to sell a box for leverage. I have some leftover cash that I need to park for some time. I see your limit order, and we can transact close to the mid price.
In that case, just start a thread and see if someone takes the other side of the trade. :)
For larger amounts, not even an absurd idea. I think the big guys trade in illiquid listed futures (in lieu of swaps) that are negotiated off-exchange. The futures exchange does the clearing and assumes the counterparty risk.
levinvest1
Posts: 1
Joined: Tue Jul 06, 2021 11:44 pm

Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by levinvest1 »

I am trying to run a Box Spread at IBKR. I am thinking about borrowing 300-500K to lower my margin interest payment. I would really appreciate some handholding here. I figured I can't use the web interface for this. I downloaded the Trader Workstation, but I can't figure out where to enter the box spread. Is there any link which explains this? Or maybe someone can help me here?
Chuck
Posts: 2199
Joined: Thu May 21, 2009 12:19 pm

Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by Chuck »

FYI this works at any broker, not just IBKR. As long as you have level something option trading. I've been playing the low interest box game at etrade for years. I've never even bothered with the relatively not great margin rates.
nalor511
Posts: 1564
Joined: Mon Jul 27, 2015 1:00 am

Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by nalor511 »

Chuck wrote: Fri Jul 16, 2021 10:42 pm FYI this works at any broker, not just IBKR. As long as you have level something option trading. I've been playing the low interest box game at etrade for years. I've never even bothered with the relatively not great margin rates.
Anyone interested in writing a quick tutorial for Fidelity?
mutedbytes
Posts: 20
Joined: Mon Mar 15, 2021 1:55 am

Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by mutedbytes »

Chuck wrote: Fri Jul 16, 2021 10:42 pm FYI this works at any broker, not just IBKR. As long as you have level something option trading. I've been playing the low interest box game at etrade for years. I've never even bothered with the relatively not great margin rates.
Pretty sure this is only useful with portfolio margin.
IBKR, TD Ameritrade, Fidelity, any other players?
nalor511
Posts: 1564
Joined: Mon Jul 27, 2015 1:00 am

Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by nalor511 »

nalor511 wrote: Wed Jul 21, 2021 5:08 pm
Chuck wrote: Fri Jul 16, 2021 10:42 pm FYI this works at any broker, not just IBKR. As long as you have level something option trading. I've been playing the low interest box game at etrade for years. I've never even bothered with the relatively not great margin rates.
Anyone interested in writing a quick tutorial for Fidelity?
Nobody? 😟
travlinman561
Posts: 20
Joined: Wed Jun 27, 2018 6:58 am

Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by travlinman561 »

Is it possible to buy (go long) SPX box spreads in a portfolio margin account in order to earn a higher interest rate on cash margin that is being used to secure naked puts, than can be earned on short term treasuries or short term high grade corporate debt?
comeinvest
Posts: 377
Joined: Mon Mar 12, 2012 6:57 pm

Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by comeinvest »

travlinman561 wrote: Sat Jul 24, 2021 5:39 am Is it possible to buy (go long) SPX box spreads in a portfolio margin account in order to earn a higher interest rate on cash margin that is being used to secure naked puts, than can be earned on short term treasuries or short term high grade corporate debt?
I read some other people did it. I personally tried once, but didn't get a fill above 0% implied interested. Please try with limit orders and let me know your experience, if possible.
Chuck
Posts: 2199
Joined: Thu May 21, 2009 12:19 pm

Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by Chuck »

travlinman561 wrote: Sat Jul 24, 2021 5:39 am Is it possible to buy (go long) SPX box spreads in a portfolio margin account in order to earn a higher interest rate on cash margin that is being used to secure naked puts, than can be earned on short term treasuries or short term high grade corporate debt?
Not likely. Since you are not a market maker, you are on the wrong side of the bid-ask spread.
Post Reply