Box Spreads as Loans - Interactive Brokers IBKR - 2021

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Freebee34
Posts: 9
Joined: Tue Oct 05, 2021 9:32 pm

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

Post by Freebee34 »

Been doing short SPX box spreads for a year and a half and getting 0.5%-0.6% on amounts of $20K - $100K. overall a good experience. here are some tips that I have learned along the way:
  • The best rates (treasury + 15 basis points) are available for those borrowing in large amounts ($500K+)
  • The strike levels can matter for speed of execution. Generally symmetric around ATM gets the quickest fills.
  • For faster execution (less than 2 hours) and better pricing I found that breaking up the trade into call spreads and put spreads is more effective. When submitting the entire box it would take DAYS for the trade to execute at a higher interest rate (0.75%+)
  • usually the last term is the least liquid. the second last one is usually much better
  • during market panics (e.g. covid, fall 2008) the required margin from the OCC on the box spread can increase. It will be up to your broker and their risk systems to decide if a liquidation is warranted
  • despite what is said above, the margin surcharge in absolute terms is usually low. it might rise from 3% to 5% or 7%. in practical terms it has not impacted my portfolio but it may for those that are highly levered
  • The tax deduction is a significant benefit for box spreads vs margin loans
  • to offset what is said above with rising rates and the 1256 tax status you may receive a tax bill come December
here is a list of the trades that I have done so far

Code: Select all

+------------+------------+--------------+---------------+-------------------+------------------+------------+----------+----------------+------------------+-----------------+--------+-----------------------+
| Trade Date |   Expiry   | Lower Strike | Higher Strike | Short Call Spread | Short Put Spread | Multiplier | Quantity | days to expiry | Short Box Spread | Value At Expiry |   PV   | Implied Interest Rate |
+------------+------------+--------------+---------------+-------------------+------------------+------------+----------+----------------+------------------+-----------------+--------+-----------------------+
| 2021-08-30 | 2023-06-16 |        4,450 |         4,650 | $113.5            | $84.5            |        100 |        1 |            655 | $198             | $200            | $2.00  | 0.56%                 |
| 2021-06-10 | 2023-12-15 |        3,900 |         4,500 | $330.0            | $260.0           |        100 |        3 |            918 | $590             | $600            | $10.00 | 0.67%                 |
| 2021-05-27 | 2022-12-16 |        4,100 |         4,300 | $115.0            | $83.0            |        100 |        1 |            568 | $198             | $200            | $2.03  | 0.66%                 |
| 2021-04-16 | 2022-12-16 |        4,050 |         4,250 | $114.5            | $83.6            |        100 |        1 |            609 | $198             | $200            | $1.83  | 0.55%                 |
| 2021-02-09 | 2022-12-16 |        3,700 |         3,900 | $118.5            | $79.5            |        100 |        1 |            675 | $198             | $200            | $2.03  | 0.55%                 |
| 2020-12-17 | 2022-12-16 |        3,600 |         3,800 | $111.5            | $85.8            |        100 |        1 |            729 | $197             | $200            | $2.73  | 0.69%                 |
| 2020-11-13 | 2022-06-17 |        3,450 |         3,650 | $112.7            | $83.7            |        100 |        1 |            581 | $196             | $200            | $3.53  | 1.13%                 |
| 2020-07-29 | 2021-12-17 |        3,150 |         3,350 | $114.2            | $83.8            |        100 |        3 |            506 | $198             | $200            | $2.03  | 0.74%                 |
| 2020-06-15 | 2021-12-17 |        2,900 |         3,100 | $113.8            | $83.9            |        100 |        3 |            550 | $198             | $200            | $2.28  | 0.76%                 |
| 2020-03-11 | 2021-06-18 |        2,700 |         2,900 | $105.9            | $92.2            |        100 |        9 |            464 | $198             | $200            | $1.88  | 0.75%                 |
+------------+------------+--------------+---------------+-------------------+------------------+------------+----------+----------------+------------------+-----------------+--------+-----------------------+

Fxmove88
Posts: 11
Joined: Thu Jun 17, 2021 3:37 am

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

Post by Fxmove88 »

I have sold a number ESTX50 boxes and gotten negative interest.
e.g. ESTX50 Dec 16, 2022 3000-5000 Box and was credited EUR 20,125.-, minus EUR 6 for the options' cost, therefore giving a net of EUR20,119.-

Margin requirement is significantly higher on ESTX50 box compared to SPX box. Also, the multiplier is only 10x as supposed to 100x in the SPX case. It's better to sell a big box in one shot and borrow large amount of Euro than to sell several small boxes as the margin requirement remains the same regardless of box size.

I needed to open IB-UKL account, the one that ends with an F, to be able to sell the box and the cash was credited into the IB-UKL account. My regular securities account remains negative as I bought European stocks which are funded with ESTX50 Box. The negative cash in the securities account and the positive cash in the IB-UKL will not consolidate with each other, but for interest expense calculation purposes both cash will net each other and will not generate interest expense, as long as the combination of the two is between EUR 0.- and EUR 50,000.-
https://www.interactivebrokers.com/en/i ... =46381&p=m

Has anybody tried on other currency Boxes like CHF (i.e SMI Box) and SEK (OSMX30 Box)?
Technically they both should be like Euro since they have negative interests.
I have not tried them since my margin is pretty much used up (by the numerous ESTX50 boxes).
I would love to hear from people who have tried them.
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outofthebox
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Joined: Thu Apr 08, 2021 3:33 pm

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

Post by outofthebox »

As you say, the multiplicator of 10 instead of 100 + the same margin requirements regardless of the box size made me sell box spreads with really large spreads, for example, ESTX50 1000-5000 boxes.
Fxmove88
Posts: 11
Joined: Thu Jun 17, 2021 3:37 am

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

Post by Fxmove88 »

outofthebox wrote: Sat Oct 09, 2021 8:43 am As you say, the multiplicator of 10 instead of 100 + the same margin requirements regardless of the box size made me sell box spreads with really large spreads, for example, ESTX50 1000-5000 boxes.
As you have European IBKR account, did you ever try with SMI Box?
xerxes101
Posts: 477
Joined: Sat Oct 14, 2017 11:25 am

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

Post by xerxes101 »

Freebee34 wrote: Tue Oct 05, 2021 10:08 pm
  • during market panics (e.g. covid, fall 2008) the required margin from the OCC on the box spread can increase. It will be up to your broker and their risk systems to decide if a liquidation is warranted
So you mean after ones initiates the box spread position the margin requirements could change / increase? could you expand on this?
Fxmove88
Posts: 11
Joined: Thu Jun 17, 2021 3:37 am

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

Post by Fxmove88 »

xerxes101 wrote: Sat Oct 09, 2021 8:57 am
So you mean after ones initiates the box spread position the margin requirements could change / increase? could you expand on this?
It is normal. even margin requirement for some stocks can go up to 100% especially those meme stocks
skierincolorado
Posts: 806
Joined: Sat Mar 21, 2020 10:56 am

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

Post by skierincolorado »

Fxmove88 wrote: Sat Oct 09, 2021 3:46 am I have sold a number ESTX50 boxes and gotten negative interest.
e.g. ESTX50 Dec 16, 2022 3000-5000 Box and was credited EUR 20,125.-, minus EUR 6 for the options' cost, therefore giving a net of EUR20,119.-

Margin requirement is significantly higher on ESTX50 box compared to SPX box. Also, the multiplier is only 10x as supposed to 100x in the SPX case. It's better to sell a big box in one shot and borrow large amount of Euro than to sell several small boxes as the margin requirement remains the same regardless of box size.

I needed to open IB-UKL account, the one that ends with an F, to be able to sell the box and the cash was credited into the IB-UKL account. My regular securities account remains negative as I bought European stocks which are funded with ESTX50 Box. The negative cash in the securities account and the positive cash in the IB-UKL will not consolidate with each other, but for interest expense calculation purposes both cash will net each other and will not generate interest expense, as long as the combination of the two is between EUR 0.- and EUR 50,000.-
https://www.interactivebrokers.com/en/i ... =46381&p=m

Has anybody tried on other currency Boxes like CHF (i.e SMI Box) and SEK (OSMX30 Box)?
Technically they both should be like Euro since they have negative interests.
I have not tried them since my margin is pretty much used up (by the numerous ESTX50 boxes).
I would love to hear from people who have tried them.
The market expects and has priced in appreciation of the EUR vs USD. This is why you get negative interest rates. There is no arbitrage opp here, only currency risk.
stay_the_course
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Joined: Tue Dec 15, 2020 11:13 pm

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

Post by stay_the_course »

nalor511 wrote: Thu Sep 23, 2021 5:37 pm
calwatch wrote: Thu Sep 23, 2021 5:17 pm I believe that the net impact on margin would be similar, box or margin loan. So you could hypothetically take out 75% of account value under Regulation T and whatever the portfolio margin algorithm says you can take out (perhaps 90% or more) under portfolio margin.
See this is the part I don't understand. You're not borrowing from your broker, you're borrowing from other parties in the market, so their loan to me is offset by a credit in my account, and a debit at a future date. I don't get where margin comes into play at all
Trying to wrap my head around box spreads as well, I think I finally may be close to understanding why and how the margin comes into play. In a traditional "cash" margin loan, you are short the cash that you borrow. This short cash is fronted to you by the broker and you pay whatever margin loan interest they charge. Now, I was assuming you can only be "short" cash, however you can also be "short" on stocks/ETFs etc. Say for example you sell a naked call for 100 shares of company A when you don't actually have 100 shares of company A. This is where the broker sort of loans you those shares on margin. Similarly in a box spread, you have taken a position (actually 4 different positions) without actually having the underlying stock/cash to support those positions and the broker has to lend you the stock/cash on margin, and thats where the margin requirement comes in. The difference is now, the loan is not one of cash (which would be more expensive), but of stocks which are not treated the same way.

Anyway I'm pretty sure I'm missing some important points, which is why I decided I don't want to invest in something I don't completely understand. Fun to work through and understand it though :sharebeer
xerxes101
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by xerxes101 »

Fxmove88 wrote: Sun Oct 10, 2021 5:10 am
xerxes101 wrote: Sat Oct 09, 2021 8:57 am
So you mean after ones initiates the box spread position the margin requirements could change / increase? could you expand on this?
It is normal. even margin requirement for some stocks can go up to 100% especially those meme stocks
OK thanks I understand now. The margin *rate* could not change however, correct?
Fxmove88
Posts: 11
Joined: Thu Jun 17, 2021 3:37 am

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

Post by Fxmove88 »

skierincolorado wrote: Sun Oct 10, 2021 5:38 pm The market expects and has priced in appreciation of the EUR vs USD. This is why you get negative interest rates. There is no arbitrage opp here, only currency risk.
I bought French, German n Dutch stocks in Europe (not their ADRs) which are funded by this OESX Box hence no FX risk. I hope to buy Swiss stocks in Switzerland if I can get funding from OSMI Box. The relevant sales tax/stamp duty is hopefully compensated by long term holding instead of paying ADR fees.
Freebee34
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Joined: Tue Oct 05, 2021 9:32 pm

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

Post by Freebee34 »

xerxes101 wrote: Mon Oct 11, 2021 7:34 am
Fxmove88 wrote: Sun Oct 10, 2021 5:10 am
xerxes101 wrote: Sat Oct 09, 2021 8:57 am
So you mean after ones initiates the box spread position the margin requirements could change / increase? could you expand on this?
It is normal. even margin requirement for some stocks can go up to 100% especially those meme stocks
OK thanks I understand now. The margin *rate* could not change however, correct?
The *rate* is the short box spread. That is the beauty of this method. Unlike the broker the rate of a box spread is constant and cannot be called in early. In 2008 many brokers pared back lending via margin "surcharges" that happened at the worst time.
skierincolorado
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by skierincolorado »

Fxmove88 wrote: Mon Oct 11, 2021 11:53 am
skierincolorado wrote: Sun Oct 10, 2021 5:38 pm The market expects and has priced in appreciation of the EUR vs USD. This is why you get negative interest rates. There is no arbitrage opp here, only currency risk.
I bought French, German n Dutch stocks in Europe (not their ADRs) which are funded by this OESX Box hence no FX risk. I hope to buy Swiss stocks in Switzerland if I can get funding from OSMI Box. The relevant sales tax/stamp duty is hopefully compensated by long term holding instead of paying ADR fees.
Right but usually when Americans buy foreign stock one of the reasons they are doing it is to gain some foreign currency exposure as an inflation hedge.

Currency forwards show the market expects the USD to depreciate. In such a situation it would be better to borrow in USD.

Part of the built-in expected return of owning foreign stocks is the expected currency appreciation currently. You'll be missing out on this currency appreciation because youf have proportional EUR denominated debts.

It's not that your position is worse. It's just that it's not better. You are more exposed to the USD than the typical U.S.-based investor at a time that the market has already priced-in a future devaluation in the USD. The lower borrowing cost you are getting is roughly offset by the expected appreciation you are missing out on. The appreciation could fail to materialize as the market expects, in which case you will do nicely. Or the expected EUR appreciation could be more than expected, in which case you will take a big hit (relative to an investor borrowing in USD). If the EUR appreciation is *near* market expectations, it will roughly be offset by the lower borrowing cost (again - relative to an investor borrowing in USD).

There's no free lunch

Do you intend to have more USD exposure than the typical boglehead investor? The typical boglehead would have around 70% USD exposure (assuming 70% VTI 30% VXUS), whereas you are near 100% (assuming most of your foreign assets are purchased with EUR denominated debt).




Reading the above, I fear I may have overcomplicated the matter. The short version is that the USD is expected to depreciate vs EUR. This expectation is built into current exchange rates, current borrowing costs, currency and interest rate forward contracts, and even domestic and foreign stock prices. Borrowing in EUR at lower borrowing costs is a wash. If you want to avoid all foreign currency exposure, borrow in EUR. If you want to have some foreign currency exposure for diversification purposes, I suggest borrowing in USD. The borrowing costs you pay in USD are not a loss - they are offset by the expected devaluation of the USD which will make those debts easier to repay using foreign assets. Personally, I prefer to take some foreign currency exposure by borrowing in USD when investing in foreign assets, as an inflation hedge.
secondopinion
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by secondopinion »

skierincolorado wrote: Mon Oct 11, 2021 3:49 pm
Fxmove88 wrote: Mon Oct 11, 2021 11:53 am
skierincolorado wrote: Sun Oct 10, 2021 5:38 pm The market expects and has priced in appreciation of the EUR vs USD. This is why you get negative interest rates. There is no arbitrage opp here, only currency risk.
I bought French, German n Dutch stocks in Europe (not their ADRs) which are funded by this OESX Box hence no FX risk. I hope to buy Swiss stocks in Switzerland if I can get funding from OSMI Box. The relevant sales tax/stamp duty is hopefully compensated by long term holding instead of paying ADR fees.
Right but usually when Americans buy foreign stock one of the reasons they are doing it is to gain some foreign currency exposure as an inflation hedge.

Currency forwards show the market expects the USD to depreciate. In such a situation it would be better to borrow in USD.

Part of the built-in expected return of owning foreign stocks is the expected currency appreciation currently. You'll be missing out on this currency appreciation because youf have proportional EUR denominated debts.

It's not that your position is worse. It's just that it's not better. You are more exposed to the USD than the typical U.S.-based investor at a time that the market has already priced-in a future devaluation in the USD. The lower borrowing cost you are getting is roughly offset by the expected appreciation you are missing out on. The appreciation could fail to materialize as the market expects, in which case you will do nicely. Or the expected EUR appreciation could be more than expected, in which case you will take a big hit (relative to an investor borrowing in USD). If the EUR appreciation is *near* market expectations, it will roughly be offset by the lower borrowing cost (again - relative to an investor borrowing in USD).

There's no free lunch

Do you intend to have more USD exposure than the typical boglehead investor? The typical boglehead would have around 70% USD exposure (assuming 70% VTI 30% VXUS), whereas you are near 100% (assuming most of your foreign assets are purchased with EUR denominated debt).




Reading the above, I fear I may have overcomplicated the matter. The short version is that the USD is expected to depreciate vs EUR. This expectation is built into current exchange rates, current borrowing costs, currency and interest rate forward contracts, and even domestic and foreign stock prices. Borrowing in EUR at lower borrowing costs is a wash. If you want to avoid all foreign currency exposure, borrow in EUR. If you want to have some foreign currency exposure for diversification purposes, I suggest borrowing in USD. The borrowing costs you pay in USD are not a loss - they are offset by the expected devaluation of the USD which will make those debts easier to repay using foreign assets. Personally, I prefer to take some foreign currency exposure by borrowing in USD when investing in foreign assets, as an inflation hedge.
Ah, the fun of currency risk. But yes, some of the usefulness of international is to have that currency risk; since hedging it out merely stabilizes it in relation to the USD, which actually fluctuates against other currencies. I never hedge currency; I just take it as a source of benefit or deficient in respect to the USD.
crippledpig
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by crippledpig »

I've read through the thread and have a pretty solid understanding of how to go about selling the box, but now I'm concerned with over-leveraging.
Does the margin call calculation change at all using this method from borrowing with a margin loan?

For reference, this is how I think it should work:

Initial portfolio balance : $100,000
Borrow $60,000 using the aforementioned technique
Updated equity exposure : $160,000
Market tanks with 50% drawdown
Updated equity exposure : $80,000
Margin % = $20,000 / $80,000 = 25% which puts you at the cusp of standard maintenance margin requirements
Last edited by crippledpig on Tue Oct 12, 2021 12:24 am, edited 1 time in total.
Freebee34
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Joined: Tue Oct 05, 2021 9:32 pm

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

Post by Freebee34 »

crippledpig wrote: Tue Oct 12, 2021 12:23 am I've read through the thread and have a pretty solid understanding of how to go about selling the box, but now I'm concerned with over-leveraging.
Does the margin call calculation change at all using this method from borrowing with a margin loan?

For reference, this is how I think it should work:

Initial portfolio balance : $100,000
Borrow $60,000 using the aforementioned technique
Updated equity exposure : $160,000
Market tanks with 50% drawdown
Updated equity exposure : $80,000
Margin % = $20,000 / $80,000 = 25% which puts you at the cusp of standard maintenance margin requirements
You have that right. That's why using that much leverage with 100% equities is a bad idea. If you have a 50/50 portfolio on the other hand times 1.6, you could think of it like having the risk of a 80/20 portfolio with an extra %60 bonds for free.
econalex
Posts: 55
Joined: Fri Aug 31, 2018 9:44 am

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

Post by econalex »

So what do you guys think about using the box to leverage against, say SWAN etf, and withdrawing the money to fund big item purchases?

On a tangent note, one can actually deposit the money at a high yielding checking account and arbitrage. Though these accounts tend to have rather low limits. The most straightforward can think of is T-Mobile money at 1% no cap. Or just move money around for account bonuses I guess :twisted:
skierincolorado
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Joined: Sat Mar 21, 2020 10:56 am

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

Post by skierincolorado »

crippledpig wrote: Tue Oct 12, 2021 12:23 am I've read through the thread and have a pretty solid understanding of how to go about selling the box, but now I'm concerned with over-leveraging.
Does the margin call calculation change at all using this method from borrowing with a margin loan?

For reference, this is how I think it should work:

Initial portfolio balance : $100,000
Borrow $60,000 using the aforementioned technique
Updated equity exposure : $160,000
Market tanks with 50% drawdown
Updated equity exposure : $80,000
Margin % = $20,000 / $80,000 = 25% which puts you at the cusp of standard maintenance margin requirements
1.6x isn't a ton of leverage by most standards, but you would need to have rebalancing bands to keep leverage from getting too high. "Lifecycle Investing" recommends 2x leverage for young investors. But the leverage ratio is held constant, so if the market goes down, you have to sell to maintain 2x leverage. To survive a 1929 crash without having to sell at all I think you can't have started with leverage around 1.2x.

Personally, I think something in between 1.2x and 2x is best, depending on age and risk tolerance. Rebalancing and selling as a market goes down doesn't usually hurt returns, but is a bit riskier. The flip side is that you also buy more and make more profits as the market goes up. For someone investing a small amount of money relative to future income (say <100k) I think being near 2x is probably best. Or 1.5x stocks + 2x or more in leveraged bonds. You just need to rebalance to maintain the target leverage.

You can go through some examples in portfolio visualizer to see how higher leverage with rebalancing doesn't hurt returns. In fact, rebalancing more frequently boosts returns. This means more selling in bear markets, but also more buying in bull markets to maintain the leverage ratio.

https://www.portfoliovisualizer.com/bac ... ion2_3=-80
skierincolorado
Posts: 806
Joined: Sat Mar 21, 2020 10:56 am

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

Post by skierincolorado »

Freebee34 wrote: Tue Oct 12, 2021 3:35 am
crippledpig wrote: Tue Oct 12, 2021 12:23 am I've read through the thread and have a pretty solid understanding of how to go about selling the box, but now I'm concerned with over-leveraging.
Does the margin call calculation change at all using this method from borrowing with a margin loan?

For reference, this is how I think it should work:

Initial portfolio balance : $100,000
Borrow $60,000 using the aforementioned technique
Updated equity exposure : $160,000
Market tanks with 50% drawdown
Updated equity exposure : $80,000
Margin % = $20,000 / $80,000 = 25% which puts you at the cusp of standard maintenance margin requirements
You have that right. That's why using that much leverage with 100% equities is a bad idea. If you have a 50/50 portfolio on the other hand times 1.6, you could think of it like having the risk of a 80/20 portfolio with an extra %60 bonds for free.
I wouldn't say 1.6x with 100% equities is a bad idea. You just have to rebalance (see post above). The Lifecycle Investing authors recommended 2x for young investors (<35-40 YO).
Freebee34
Posts: 9
Joined: Tue Oct 05, 2021 9:32 pm

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

Post by Freebee34 »

skierincolorado wrote: Tue Oct 12, 2021 12:27 pm
Freebee34 wrote: Tue Oct 12, 2021 3:35 am
crippledpig wrote: Tue Oct 12, 2021 12:23 am I've read through the thread and have a pretty solid understanding of how to go about selling the box, but now I'm concerned with over-leveraging.
Does the margin call calculation change at all using this method from borrowing with a margin loan?

For reference, this is how I think it should work:

Initial portfolio balance : $100,000
Borrow $60,000 using the aforementioned technique
Updated equity exposure : $160,000
Market tanks with 50% drawdown
Updated equity exposure : $80,000
Margin % = $20,000 / $80,000 = 25% which puts you at the cusp of standard maintenance margin requirements
You have that right. That's why using that much leverage with 100% equities is a bad idea. If you have a 50/50 portfolio on the other hand times 1.6, you could think of it like having the risk of a 80/20 portfolio with an extra %60 bonds for free.
I wouldn't say 1.6x with 100% equities is a bad idea. You just have to rebalance (see post above). The Lifecycle Investing authors recommended 2x for young investors (<35-40 YO).
A 50% drop in stocks happens about every 20ish years. I don't think normal people can live with loosing 75% of thier savings in 6 months.
skierincolorado
Posts: 806
Joined: Sat Mar 21, 2020 10:56 am

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

Post by skierincolorado »

Freebee34 wrote: Tue Oct 12, 2021 10:13 pm
skierincolorado wrote: Tue Oct 12, 2021 12:27 pm
Freebee34 wrote: Tue Oct 12, 2021 3:35 am
crippledpig wrote: Tue Oct 12, 2021 12:23 am I've read through the thread and have a pretty solid understanding of how to go about selling the box, but now I'm concerned with over-leveraging.
Does the margin call calculation change at all using this method from borrowing with a margin loan?

For reference, this is how I think it should work:

Initial portfolio balance : $100,000
Borrow $60,000 using the aforementioned technique
Updated equity exposure : $160,000
Market tanks with 50% drawdown
Updated equity exposure : $80,000
Margin % = $20,000 / $80,000 = 25% which puts you at the cusp of standard maintenance margin requirements
You have that right. That's why using that much leverage with 100% equities is a bad idea. If you have a 50/50 portfolio on the other hand times 1.6, you could think of it like having the risk of a 80/20 portfolio with an extra %60 bonds for free.
I wouldn't say 1.6x with 100% equities is a bad idea. You just have to rebalance (see post above). The Lifecycle Investing authors recommended 2x for young investors (<35-40 YO).
A 50% drop in stocks happens about every 20ish years. I don't think normal people can live with loosing 75% of thier savings in 6 months.
First of all, with 1.6x leverage, if you rebalance on the way down, you won’t lose 75%. More like 70%.

Secondly, they are only losing 70% of current savings, not 70% of lifetime savings.

Third, the market is very likely to recover at some point.

This is what the authors of lifecycle investing recommend and proved *always* has been to the advantage of every cohort since 1900, including cohorts that were leveraged in 1929.

So it’s the rational thing to do (with some caveats like being confident you will not need the money until retirement, probably buying life insurance and disability insurance etc). Whether most people can handle it psychologically is another question.
Freebee34
Posts: 9
Joined: Tue Oct 05, 2021 9:32 pm

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

Post by Freebee34 »

skierincolorado wrote: Wed Oct 13, 2021 8:37 am
Freebee34 wrote: Tue Oct 12, 2021 10:13 pm
skierincolorado wrote: Tue Oct 12, 2021 12:27 pm
Freebee34 wrote: Tue Oct 12, 2021 3:35 am
crippledpig wrote: Tue Oct 12, 2021 12:23 am I've read through the thread and have a pretty solid understanding of how to go about selling the box, but now I'm concerned with over-leveraging.
Does the margin call calculation change at all using this method from borrowing with a margin loan?

For reference, this is how I think it should work:

Initial portfolio balance : $100,000
Borrow $60,000 using the aforementioned technique
Updated equity exposure : $160,000
Market tanks with 50% drawdown
Updated equity exposure : $80,000
Margin % = $20,000 / $80,000 = 25% which puts you at the cusp of standard maintenance margin requirements
You have that right. That's why using that much leverage with 100% equities is a bad idea. If you have a 50/50 portfolio on the other hand times 1.6, you could think of it like having the risk of a 80/20 portfolio with an extra %60 bonds for free.
I wouldn't say 1.6x with 100% equities is a bad idea. You just have to rebalance (see post above). The Lifecycle Investing authors recommended 2x for young investors (<35-40 YO).
A 50% drop in stocks happens about every 20ish years. I don't think normal people can live with loosing 75% of thier savings in 6 months.
First of all, with 1.6x leverage, if you rebalance on the way down, you won’t lose 75%. More like 70%.

Secondly, they are only losing 70% of current savings, not 70% of lifetime savings.

Third, the market is very likely to recover at some point.

This is what the authors of lifecycle investing recommend and proved *always* has been to the advantage of every cohort since 1900, including cohorts that were leveraged in 1929.

So it’s the rational thing to do (with some caveats like being confident you will not need the money until retirement, probably buying life insurance and disability insurance etc). Whether most people can handle it psychologically is another question.
Maybe I am misunderstanding the straegy. If you are 160% in equities what is there to rebalance?
skierincolorado
Posts: 806
Joined: Sat Mar 21, 2020 10:56 am

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

Post by skierincolorado »

Freebee34 wrote: Wed Oct 13, 2021 9:51 pm
skierincolorado wrote: Wed Oct 13, 2021 8:37 am
Freebee34 wrote: Tue Oct 12, 2021 10:13 pm
skierincolorado wrote: Tue Oct 12, 2021 12:27 pm
Freebee34 wrote: Tue Oct 12, 2021 3:35 am

You have that right. That's why using that much leverage with 100% equities is a bad idea. If you have a 50/50 portfolio on the other hand times 1.6, you could think of it like having the risk of a 80/20 portfolio with an extra %60 bonds for free.
I wouldn't say 1.6x with 100% equities is a bad idea. You just have to rebalance (see post above). The Lifecycle Investing authors recommended 2x for young investors (<35-40 YO).
A 50% drop in stocks happens about every 20ish years. I don't think normal people can live with loosing 75% of thier savings in 6 months.
First of all, with 1.6x leverage, if you rebalance on the way down, you won’t lose 75%. More like 70%.

Secondly, they are only losing 70% of current savings, not 70% of lifetime savings.

Third, the market is very likely to recover at some point.

This is what the authors of lifecycle investing recommend and proved *always* has been to the advantage of every cohort since 1900, including cohorts that were leveraged in 1929.

So it’s the rational thing to do (with some caveats like being confident you will not need the money until retirement, probably buying life insurance and disability insurance etc). Whether most people can handle it psychologically is another question.
Maybe I am misunderstanding the straegy. If you are 160% in equities what is there to rebalance?
The leverage ratio. In "Lifecycle Investing" they used a fixed 2x leverage until about age 40, then a glidepath to gradually reduce leverage.
LoveTheBogle
Posts: 102
Joined: Tue Aug 13, 2019 5:53 pm

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

Post by LoveTheBogle »

What are the risks by closing the box spread four legs prior to expiration?

For example let’s say someone did a box spread options this month that are set to expire December 2023 for $500,000 to buy a house right now and sell in a few years. The house buy side which is what the 500k was earmarked for falls through and this person doesn’t want to pay the sub 1% interest rate equivalent 2+ years down the road. What actions does this person take and more importantly what are the risks or maximum loss?

I ask because it seems like a lot of people say to double check, triple check your order because doing it wrong could be catastrophic. How so? Seems like someone could easily just do opposite order to close out the positions.
calwatch
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by calwatch »

LoveTheBogle wrote: Thu Oct 14, 2021 5:31 pm What are the risks by closing the box spread four legs prior to expiration?

For example let’s say someone did a box spread options this month that are set to expire December 2023 for $500,000 to buy a house right now and sell in a few years. The house buy side which is what the 500k was earmarked for falls through and this person doesn’t want to pay the sub 1% interest rate equivalent 2+ years down the road. What actions does this person take and more importantly what are the risks or maximum loss?

I ask because it seems like a lot of people say to double check, triple check your order because doing it wrong could be catastrophic. How so? Seems like someone could easily just do opposite order to close out the positions.
Other than interest rate change, not much. The main issue is the insane bid ask spreads and the fact that a badly written limit order could fill at an extremely undesirable price. But if you flip the order around and move the price by 25-50 cents a day it should fill within a week or so.
stay_the_course
Posts: 31
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by stay_the_course »

calwatch wrote: Fri Oct 15, 2021 12:26 am
LoveTheBogle wrote: Thu Oct 14, 2021 5:31 pm What are the risks by closing the box spread four legs prior to expiration?

For example let’s say someone did a box spread options this month that are set to expire December 2023 for $500,000 to buy a house right now and sell in a few years. The house buy side which is what the 500k was earmarked for falls through and this person doesn’t want to pay the sub 1% interest rate equivalent 2+ years down the road. What actions does this person take and more importantly what are the risks or maximum loss?

I ask because it seems like a lot of people say to double check, triple check your order because doing it wrong could be catastrophic. How so? Seems like someone could easily just do opposite order to close out the positions.
Other than interest rate change, not much. The main issue is the insane bid ask spreads and the fact that a badly written limit order could fill at an extremely undesirable price. But if you flip the order around and move the price by 25-50 cents a day it should fill within a week or so.
Could you clarify how an interest rate change (up or down) is risky? Or is it risky only if you close the spread early? Thanks!
Freebee34
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by Freebee34 »

stay_the_course wrote: Fri Oct 15, 2021 5:19 pm
calwatch wrote: Fri Oct 15, 2021 12:26 am
LoveTheBogle wrote: Thu Oct 14, 2021 5:31 pm What are the risks by closing the box spread four legs prior to expiration?

For example let’s say someone did a box spread options this month that are set to expire December 2023 for $500,000 to buy a house right now and sell in a few years. The house buy side which is what the 500k was earmarked for falls through and this person doesn’t want to pay the sub 1% interest rate equivalent 2+ years down the road. What actions does this person take and more importantly what are the risks or maximum loss?

I ask because it seems like a lot of people say to double check, triple check your order because doing it wrong could be catastrophic. How so? Seems like someone could easily just do opposite order to close out the positions.
Other than interest rate change, not much. The main issue is the insane bid ask spreads and the fact that a badly written limit order could fill at an extremely undesirable price. But if you flip the order around and move the price by 25-50 cents a day it should fill within a week or so.
Could you clarify how an interest rate change (up or down) is risky? Or is it risky only if you close the spread early? Thanks!
From a purely technical perspective, there is not interest rate risk to a short box spread kind of like there is no interest rate risk if you hold a 20 year t bill to maturity. There is a mark to market interest rate risk however for most people the impact of that will be minimal. For example if you borrow 100k at 1% due two years from now and midway though interest rates fall to 0.5% you will have a mark to market loss (and rise in collateral) of approx $500. As long as you hold to expiry you will not pay this cost. On the flip side if interest rates rise 1% you will get a mark to market gain
calwatch
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by calwatch »

Freebee34 wrote: Sat Oct 16, 2021 7:01 am From a purely technical perspective, there is not interest rate risk to a short box spread kind of like there is no interest rate risk if you hold a 20 year t bill to maturity. There is a mark to market interest rate risk however for most people the impact of that will be minimal. For example if you borrow 100k at 1% due two years from now and midway though interest rates fall to 0.5% you will have a mark to market loss (and rise in collateral) of approx $500. As long as you hold to expiry you will not pay this cost. On the flip side if interest rates rise 1% you will get a mark to market gain
Thank you for explaining it better than I could. Also the mark to market gains or losses flow through at the end of the year to Form 6781 which may create a capital gain or loss.
LoveTheBogle
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by LoveTheBogle »

Is the end of year produced Form 6781 basically showing a tiny loss (or gain) relative to the amount of the proceeds? For example if you short box spread for 100k right now maybe you have a few hundred dollar loss (or gain) on form 6781 due to mark to market rules?
comeinvest
Posts: 482
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by comeinvest »

calwatch wrote: Tue Oct 05, 2021 7:22 pm Just sold one for 4000/4500 SPX, December 2023 for $492.30. I started at $496 and dropped my order by 30-50 cents every day until it was filled - prior to market close I moved from $492.60 to $492.30 and it filled seven minutes later. The annualized interest rate is 0.72% which is higher than my December 2022 boxes at 0.5%-ish.

I'm somewhat tempted to start paying down my 2.24% HELOC but have to maintain my commitment of $250k in equity for the TD Ameritrade bonus I did about seven months ago.
Do you have any indication that this "dropping exercise" results in better rates than you would have gotten either by putting in a limit low enough that you know it gets immediately filled, or by dropping the limit quickly like every few seconds until it gets filled? Doing this exercise over days costs not only time, but also money as you will pay brokerage interest for every day that your trade gets delayed (assuming your box is to replace brokerage margin). I have no proof, but a feeling that it makes no difference. I got very consistent results by putting in limit SELL orders below the level that I'm confident they will fill, and they got always filled higher than my limit with no "outliers" so far, which indicates to me that a bidding auction was performed and that bots acted using relatively consistent models. I do this because I figured the opportunity cost from paying daily broker's margin in case my fill get delayed might be higher than the incremental benefit from optimizing the rate (if there is any). GTC orders getting filled after days might just be a result of market fluctuations during the time frame when the order was active. I think CBOE performs a micro auction for each incoming complex order. If no dealer wants the box when the auction is performed, why would they be interested later, unless the market changed? I'm happy to stand corrected.
comeinvest
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by comeinvest »

skierincolorado wrote: Mon Oct 11, 2021 3:49 pm
Fxmove88 wrote: Mon Oct 11, 2021 11:53 am
skierincolorado wrote: Sun Oct 10, 2021 5:38 pm The market expects and has priced in appreciation of the EUR vs USD. This is why you get negative interest rates. There is no arbitrage opp here, only currency risk.
I bought French, German n Dutch stocks in Europe (not their ADRs) which are funded by this OESX Box hence no FX risk. I hope to buy Swiss stocks in Switzerland if I can get funding from OSMI Box. The relevant sales tax/stamp duty is hopefully compensated by long term holding instead of paying ADR fees.
Right but usually when Americans buy foreign stock one of the reasons they are doing it is to gain some foreign currency exposure as an inflation hedge.

Currency forwards show the market expects the USD to depreciate. In such a situation it would be better to borrow in USD.

Part of the built-in expected return of owning foreign stocks is the expected currency appreciation currently. You'll be missing out on this currency appreciation because youf have proportional EUR denominated debts.

It's not that your position is worse. It's just that it's not better. You are more exposed to the USD than the typical U.S.-based investor at a time that the market has already priced-in a future devaluation in the USD. The lower borrowing cost you are getting is roughly offset by the expected appreciation you are missing out on. The appreciation could fail to materialize as the market expects, in which case you will do nicely. Or the expected EUR appreciation could be more than expected, in which case you will take a big hit (relative to an investor borrowing in USD). If the EUR appreciation is *near* market expectations, it will roughly be offset by the lower borrowing cost (again - relative to an investor borrowing in USD).

There's no free lunch

Do you intend to have more USD exposure than the typical boglehead investor? The typical boglehead would have around 70% USD exposure (assuming 70% VTI 30% VXUS), whereas you are near 100% (assuming most of your foreign assets are purchased with EUR denominated debt).




Reading the above, I fear I may have overcomplicated the matter. The short version is that the USD is expected to depreciate vs EUR. This expectation is built into current exchange rates, current borrowing costs, currency and interest rate forward contracts, and even domestic and foreign stock prices. Borrowing in EUR at lower borrowing costs is a wash. If you want to avoid all foreign currency exposure, borrow in EUR. If you want to have some foreign currency exposure for diversification purposes, I suggest borrowing in USD. The borrowing costs you pay in USD are not a loss - they are offset by the expected devaluation of the USD which will make those debts easier to repay using foreign assets. Personally, I prefer to take some foreign currency exposure by borrowing in USD when investing in foreign assets, as an inflation hedge.
@skierincolorado: I assume Fxmove88 is based in Europe, so you have to swap "foreign" and "domestic" if you want to speak from his/her perspective.

My understanding is that the forward rates are determined almost 100% by the prevailing interest rates in either currency via a direct no-arbitrage argument, but the rates may or may not entirely reflect expected currency appreciation or depreciation. Now the question arises which currencies should I borrow in which proportion for my leveraged global investment strategy. I don't have the answer, but I am observing that I think currently the difference in inflation expectations between USD and EUR is smaller than the difference in rates. If true, and if we assume that exchange rates are governed by PPP (purchase power parity) in the very long run i.e. real exchange rates are constant, then it would be beneficial to borrow in EUR. On the other hand, in taxable accounts, borrowing in USD via box spreads results in a higher tax deduction than for box spreads in EUR for the same borrowed money, because of the higher nominal rates.

U.S. based investors are not allowed to trade box spreads on European indexes. However we can simulate borrowing in EUR, or otherwise adjust our currency exposure, via currency futures.
Last edited by comeinvest on Mon Oct 18, 2021 3:46 am, edited 1 time in total.
comeinvest
Posts: 482
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by comeinvest »

calwatch wrote: Fri Oct 15, 2021 12:26 am
LoveTheBogle wrote: Thu Oct 14, 2021 5:31 pm What are the risks by closing the box spread four legs prior to expiration?

For example let’s say someone did a box spread options this month that are set to expire December 2023 for $500,000 to buy a house right now and sell in a few years. The house buy side which is what the 500k was earmarked for falls through and this person doesn’t want to pay the sub 1% interest rate equivalent 2+ years down the road. What actions does this person take and more importantly what are the risks or maximum loss?

I ask because it seems like a lot of people say to double check, triple check your order because doing it wrong could be catastrophic. How so? Seems like someone could easily just do opposite order to close out the positions.
Other than interest rate change, not much. The main issue is the insane bid ask spreads and the fact that a badly written limit order could fill at an extremely undesirable price. But if you flip the order around and move the price by 25-50 cents a day it should fill within a week or so.
I once had to reverse the sale of a box spread that I placed by mistake. I sold the box for ca. 0.55%, and bought it back for ca. 0.45% interest rate. I think that box was for 3 months expiration. The "penalty" in this case was 0.1% / 4 (one quarter of a year) = 0.025%, if my math is right. I don't know how the difference in achievable fills between the sale and the purchase of a box varies with time to expiration. That would be an interesting question to determine the "prepayment fees".

That was about 2 months ago, in August 2021. Looking at this experiment, I am noticing that one could achieve higher interest rates on cash with boxes than with money market funds, and higher than the risk-free rate. I'm a bit puzzled how that can be, if we assume that options spreads are considered counterparty risk-free, as it would present an arbitrage opportunity for institutional traders.
Freebee34
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by Freebee34 »

comeinvest wrote: Mon Oct 18, 2021 3:38 am
calwatch wrote: Fri Oct 15, 2021 12:26 am
LoveTheBogle wrote: Thu Oct 14, 2021 5:31 pm What are the risks by closing the box spread four legs prior to expiration?

For example let’s say someone did a box spread options this month that are set to expire December 2023 for $500,000 to buy a house right now and sell in a few years. The house buy side which is what the 500k was earmarked for falls through and this person doesn’t want to pay the sub 1% interest rate equivalent 2+ years down the road. What actions does this person take and more importantly what are the risks or maximum loss?

I ask because it seems like a lot of people say to double check, triple check your order because doing it wrong could be catastrophic. How so? Seems like someone could easily just do opposite order to close out the positions.
Other than interest rate change, not much. The main issue is the insane bid ask spreads and the fact that a badly written limit order could fill at an extremely undesirable price. But if you flip the order around and move the price by 25-50 cents a day it should fill within a week or so.
I once had to reverse the sale of a box spread that I placed by mistake. I sold the box for ca. 0.55%, and bought it back for ca. 0.45% interest rate. I think that box was for 3 months expiration. The "penalty" in this case was 0.1% / 4 (one quarter of a year) = 0.025%, if my math is right. I don't know how the difference in achievable fills between the sale and the purchase of a box varies with time to expiration. That would be an interesting question to determine the "prepayment fees".

That was about 2 months ago, in August 2021. Looking at this experiment, I am noticing that one could achieve higher interest rates on cash with boxes than with money market funds, and higher than the risk-free rate. I'm a bit puzzled how that can be, if we assume that options spreads are considered counterparty risk-free, as it would present an arbitrage opportunity for institutional traders.
A a box spread is not "fungible" and/or liquid. It only has value in the context of a OCC cleared trading account. Treasuries, bank reserves, and checking accounts can be used everywhere to pay for (pretty much) everything and thus have a lower interest rate.
moneyflowin
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by moneyflowin »

In terms of getting the lowest interest rate, are you better off trying to sell a single $500k box, or 5x $100k or 10x $50k? Or does it not matter?
Fxmove88
Posts: 11
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by Fxmove88 »

moneyflowin wrote: Mon Oct 18, 2021 10:16 am In terms of getting the lowest interest rate, are you better off trying to sell a single $500k box, or 5x $100k or 10x $50k? Or does it not matter?
I also have a similar question, but in terms of option costs that we have to pay and option premiums we will receive, when we sell a bigger box vs a smaller box. It's confusing I know since we're reversing the box in our watchlists. I would appreciate option experts to comment.

One thing for sure it seems, selling a bigger box saves on option transaction fees and allows you do to more leverage in the future (saves on margin).
corp_sharecropper
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by corp_sharecropper »

skierincolorado wrote: Tue Oct 12, 2021 12:20 pm
crippledpig wrote: Tue Oct 12, 2021 12:23 am I've read through the thread and have a pretty solid understanding of how to go about selling the box, but now I'm concerned with over-leveraging.
Does the margin call calculation change at all using this method from borrowing with a margin loan?

For reference, this is how I think it should work:

Initial portfolio balance : $100,000
Borrow $60,000 using the aforementioned technique
Updated equity exposure : $160,000
Market tanks with 50% drawdown
Updated equity exposure : $80,000
Margin % = $20,000 / $80,000 = 25% which puts you at the cusp of standard maintenance margin requirements
1.6x isn't a ton of leverage by most standards, but you would need to have rebalancing bands to keep leverage from getting too high. "Lifecycle Investing" recommends 2x leverage for young investors. But the leverage ratio is held constant, so if the market goes down, you have to sell to maintain 2x leverage. To survive a 1929 crash without having to sell at all I think you can't have started with leverage around 1.2x.

Personally, I think something in between 1.2x and 2x is best, depending on age and risk tolerance. Rebalancing and selling as a market goes down doesn't usually hurt returns, but is a bit riskier. The flip side is that you also buy more and make more profits as the market goes up. For someone investing a small amount of money relative to future income (say <100k) I think being near 2x is probably best. Or 1.5x stocks + 2x or more in leveraged bonds. You just need to rebalance to maintain the target leverage.

You can go through some examples in portfolio visualizer to see how higher leverage with rebalancing doesn't hurt returns. In fact, rebalancing more frequently boosts returns. This means more selling in bear markets, but also more buying in bull markets to maintain the leverage ratio.

https://www.portfoliovisualizer.com/bac ... ion2_3=-80
So much depends on what you're leveraging, not just the multiplier. I've been leveraged around 2.2x ytd.. but that's not 220% equities. In fact my portfolio volatility is about on par with 100% US large cap. I'm also only explicitly leveraged 1.6x under RegT as some of the leverage is implicit in the holdings, where they have more room to maneuver than an individual.
learntoinvest123
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by learntoinvest123 »

Question.. what happens at expiration if you don't close this position? Does the broker only collect the loan or actually exercise each option leg?
skierincolorado
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by skierincolorado »

corp_sharecropper wrote: Mon Oct 18, 2021 9:08 pm
skierincolorado wrote: Tue Oct 12, 2021 12:20 pm
crippledpig wrote: Tue Oct 12, 2021 12:23 am I've read through the thread and have a pretty solid understanding of how to go about selling the box, but now I'm concerned with over-leveraging.
Does the margin call calculation change at all using this method from borrowing with a margin loan?

For reference, this is how I think it should work:

Initial portfolio balance : $100,000
Borrow $60,000 using the aforementioned technique
Updated equity exposure : $160,000
Market tanks with 50% drawdown
Updated equity exposure : $80,000
Margin % = $20,000 / $80,000 = 25% which puts you at the cusp of standard maintenance margin requirements
1.6x isn't a ton of leverage by most standards, but you would need to have rebalancing bands to keep leverage from getting too high. "Lifecycle Investing" recommends 2x leverage for young investors. But the leverage ratio is held constant, so if the market goes down, you have to sell to maintain 2x leverage. To survive a 1929 crash without having to sell at all I think you can't have started with leverage around 1.2x.

Personally, I think something in between 1.2x and 2x is best, depending on age and risk tolerance. Rebalancing and selling as a market goes down doesn't usually hurt returns, but is a bit riskier. The flip side is that you also buy more and make more profits as the market goes up. For someone investing a small amount of money relative to future income (say <100k) I think being near 2x is probably best. Or 1.5x stocks + 2x or more in leveraged bonds. You just need to rebalance to maintain the target leverage.

You can go through some examples in portfolio visualizer to see how higher leverage with rebalancing doesn't hurt returns. In fact, rebalancing more frequently boosts returns. This means more selling in bear markets, but also more buying in bull markets to maintain the leverage ratio.

https://www.portfoliovisualizer.com/bac ... ion2_3=-80
So much depends on what you're leveraging, not just the multiplier. I've been leveraged around 2.2x ytd.. but that's not 220% equities. In fact my portfolio volatility is about on par with 100% US large cap. I'm also only explicitly leveraged 1.6x under RegT as some of the leverage is implicit in the holdings, where they have more room to maneuver than an individual.
Yes the above was only for equity leverage.
learntoinvest123
Posts: 87
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by learntoinvest123 »

Curious as to what folks are doing with the loan (assuming they are investing it in the market).

Using crippeledpig's example, doesnt box spread come with a lot of additional risk?

Initial portfolio balance : $100,000
Borrow $60,000 (margin or using box)
Updated equity exposure : $160,000
Market tanks with 50% drawdown
Updated equity exposure : $80,000
Margin % = $20,000 / $80,000 = 25% which puts you at the cusp of standard maintenance margin requirements

If we are using standard margin (assuming 30% maintenance requirement), then in the above example we have to come up with 4k. However, if the box is about the expire, we will have to come up with 60k. That is a ton of risk if the "loaned" money is being used to invest in stocks.

Am I interpreting this correctly?
moneyflowin
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by moneyflowin »

learntoinvest123 wrote: Mon Oct 18, 2021 9:28 pm Question.. what happens at expiration if you don't close this position? Does the broker only collect the loan or actually exercise each option leg?
The short box disappears, as the broker automatically exercises the options. In the process of doing this, the cash from the short box also disappears, and you now revert to a cash debit balance (ie, margin loan).
stay_the_course
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by stay_the_course »

Out of curiosity, I see spx options only till dec 23, when do options for later years come? And is it better to wait till those are released to “lock” in a rate for longer?
calwatch
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by calwatch »

comeinvest wrote: Mon Oct 18, 2021 2:05 am Do you have any indication that this "dropping exercise" results in better rates than you would have gotten either by putting in a limit low enough that you know it gets immediately filled, or by dropping the limit quickly like every few seconds until it gets filled? Doing this exercise over days costs not only time, but also money as you will pay brokerage interest for every day that your trade gets delayed (assuming your box is to replace brokerage margin). I have no proof, but a feeling that it makes no difference. I got very consistent results by putting in limit SELL orders below the level that I'm confident they will fill, and they got always filled higher than my limit with no "outliers" so far, which indicates to me that a bidding auction was performed and that bots acted using relatively consistent models. I do this because I figured the opportunity cost from paying daily broker's margin in case my fill get delayed might be higher than the incremental benefit from optimizing the rate (if there is any). GTC orders getting filled after days might just be a result of market fluctuations during the time frame when the order was active. I think CBOE performs a micro auction for each incoming complex order. If no dealer wants the box when the auction is performed, why would they be interested later, unless the market changed? I'm happy to stand corrected.
The dropping thing was on the lesswrong article. I set it at a more than fair price for my first box and did not get any price improvement. My history of boxes is in the thread. They are being invested in ETFs (a large growth ETF just to draft off this bull market for the short term) and I have not taken the money out.
Freebee34
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Joined: Tue Oct 05, 2021 9:32 pm

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

Post by Freebee34 »

stay_the_course wrote: Tue Oct 19, 2021 10:03 pm Out of curiosity, I see spx options only till dec 23, when do options for later years come? And is it better to wait till those are released to “lock” in a rate for longer?
The furthest out listed spx options are 3 years out, though usually it is 2-2.5 years. The lock would be beneficial if you think interest rates will be rising. The further out you go, the less liquid the options will be giving a lower chance of execution.
stay_the_course
Posts: 31
Joined: Tue Dec 15, 2020 11:13 pm

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

Post by stay_the_course »

Curious if anyone knows, since financing using box spreads seems to have been around for quite a while: historically what has the implied interest been on these usually? 2-3 year treasuries + 0.3/0.5 or something else? (granted of course that it might vary widely based on your fill)
comeinvest
Posts: 482
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by comeinvest »

Freebee34 wrote: Mon Oct 18, 2021 5:36 am
comeinvest wrote: Mon Oct 18, 2021 3:38 am
calwatch wrote: Fri Oct 15, 2021 12:26 am
LoveTheBogle wrote: Thu Oct 14, 2021 5:31 pm What are the risks by closing the box spread four legs prior to expiration?

For example let’s say someone did a box spread options this month that are set to expire December 2023 for $500,000 to buy a house right now and sell in a few years. The house buy side which is what the 500k was earmarked for falls through and this person doesn’t want to pay the sub 1% interest rate equivalent 2+ years down the road. What actions does this person take and more importantly what are the risks or maximum loss?

I ask because it seems like a lot of people say to double check, triple check your order because doing it wrong could be catastrophic. How so? Seems like someone could easily just do opposite order to close out the positions.
Other than interest rate change, not much. The main issue is the insane bid ask spreads and the fact that a badly written limit order could fill at an extremely undesirable price. But if you flip the order around and move the price by 25-50 cents a day it should fill within a week or so.
I once had to reverse the sale of a box spread that I placed by mistake. I sold the box for ca. 0.55%, and bought it back for ca. 0.45% interest rate. I think that box was for 3 months expiration. The "penalty" in this case was 0.1% / 4 (one quarter of a year) = 0.025%, if my math is right. I don't know how the difference in achievable fills between the sale and the purchase of a box varies with time to expiration. That would be an interesting question to determine the "prepayment fees".

That was about 2 months ago, in August 2021. Looking at this experiment, I am noticing that one could achieve higher interest rates on cash with boxes than with money market funds, and higher than the risk-free rate. I'm a bit puzzled how that can be, if we assume that options spreads are considered counterparty risk-free, as it would present an arbitrage opportunity for institutional traders.
A a box spread is not "fungible" and/or liquid. It only has value in the context of a OCC cleared trading account. Treasuries, bank reserves, and checking accounts can be used everywhere to pay for (pretty much) everything and thus have a lower interest rate.
I would say a box spread is fungible, as arbitrage traders, banks, or hedge funds could borrow in the interbank market or from money market funds, and invest in boxes. Risk free cash is fungible with risk free cash. It must have to do with balance sheet restrictions. I found the rate is slightly higher than the current yield of the most conservative money market funds. Might be a good method to park cash if needed.
Freebee34
Posts: 9
Joined: Tue Oct 05, 2021 9:32 pm

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

Post by Freebee34 »

stay_the_course wrote: Wed Oct 20, 2021 10:42 pm Curious if anyone knows, since financing using box spreads seems to have been around for quite a while: historically what has the implied interest been on these usually? 2-3 year treasuries + 0.3/0.5 or something else? (granted of course that it might vary widely based on your fill)
I found the best executed rates to be treasuries +25 basis points. Treasuries +45 is more typical though. If you do a lot (500k+) you might be able to get it down to 15
BeerTooth
Posts: 393
Joined: Wed Nov 24, 2010 3:07 pm

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

Post by BeerTooth »

was hoping to find a brokerage to set this up for me for small fee, without needing to understand the mechanics of setting up the box spread, or risking entering it wrong

I came across this company, offering Fed Funds rate + 0.40

https://biltmorecap.com/margin-loans/

Anyone have any experience with them?
learntoinvest123
Posts: 87
Joined: Sat Aug 29, 2020 9:20 am

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

Post by learntoinvest123 »

BeerTooth wrote: Thu Oct 21, 2021 1:28 pm was hoping to find a brokerage to set this up for me for small fee, without needing to understand the mechanics of setting up the box spread, or risking entering it wrong
I was apprehensive about doing this myself,but it is really easy on good broker platform. You set up the legs as outlined in many posts here. You don't have to do it manually, brokers offer a vertical spread option, you pick that, the SPX price spread and it shows credit.

Though I have not done it, it looks like the whole box is executed (all 4 legs are executed or none at all). You can move the price up or down on the entire box. It looks like a single trade (like buying a stock).

The real risk here is on expiration, you will owe the loan back (difference between the two SPX prices * 1000). If you invested the loan amount somewhere (say VT) and the markets tank a week before, you have to pay back the entire amount or risk liquidation (though I suppose liquidation will happen much earlier). You can write another box and roll it, but that is assuming you have the buying power.

Contrast that with borrowing on margin instead. Standard margin borrowing technically has no "end date" on the loan and you only have to meet the margin call.
skierincolorado
Posts: 806
Joined: Sat Mar 21, 2020 10:56 am

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

Post by skierincolorado »

learntoinvest123 wrote: Thu Oct 21, 2021 2:26 pm
BeerTooth wrote: Thu Oct 21, 2021 1:28 pm was hoping to find a brokerage to set this up for me for small fee, without needing to understand the mechanics of setting up the box spread, or risking entering it wrong
I was apprehensive about doing this myself,but it is really easy on good broker platform. You set up the legs as outlined in many posts here. You don't have to do it manually, brokers offer a vertical spread option, you pick that, the SPX price spread and it shows credit.

Though I have not done it, it looks like the whole box is executed (all 4 legs are executed or none at all). You can move the price up or down on the entire box. It looks like a single trade (like buying a stock).

The real risk here is on expiration, you will owe the loan back (difference between the two SPX prices * 1000). If you invested the loan amount somewhere (say VT) and the markets tank a week before, you have to pay back the entire amount or risk liquidation (though I suppose liquidation will happen much earlier). You can write another box and roll it, but that is assuming you have the buying power.

Contrast that with borrowing on margin instead. Standard margin borrowing technically has no "end date" on the loan and you only have to meet the margin call.
It's really no different than margin. In fact, it's really just a refinance of your margin loan to a lower rate. If you meet the requirements for a margin loan, then you almost certainly have the buying power to refinance that loan to the lower box spread rate, since the margin requirement for the box spread is almost nothing. Only if you were very very leveraged, bumping up against the margin and liquidity limits of your broker, would you potentially have trouble writing your box to refinance your margin loan. I don't think anyody should be that leveraged anyways (4x at most brokers in Reg T account).
nalor511
Posts: 1926
Joined: Mon Jul 27, 2015 1:00 am

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

Post by nalor511 »

I would do this, but have decided I am too chicken.
spacecadet610
Posts: 93
Joined: Sun Aug 26, 2012 1:41 pm

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

Post by spacecadet610 »

I've done box spread loans 4 times in last couple months for a total of $100k at a rate of about 0.7% using etrade.

I've been using that money to buy SPY as it had dropped.

The box spread loans "cost" me about $1600 in "loan fees" for the $100k loan. So far, i have about $3k in capital gains on the SPY which more than pays for the loan fees.

By the time i have to "pay back" the "loan" in Dec 2023, i'd expect to be much more ahead. No guarantee, but i'm pretty sure.

Much better than casino odds, at least.
Last edited by spacecadet610 on Thu Oct 21, 2021 8:13 pm, edited 1 time in total.
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