Let's Talk SPX Box Spreads

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comeinvest
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Re: Let's Talk SPX Box Spreads

Post by comeinvest »

Investing Lawyer wrote: Fri Jul 15, 2022 9:10 pm Bad print: The "value" of your positions reflected in your brokerage account are likely either quoted on the last reportable trade or the mid-point from the bid/ask spread. If there's a trade that occurs far from a good "market" price or if there's a terrible bid/ask spread the "value" shown on your brokerage statement could represent a stale trade or not fair value price. Look at the option sheets to see the volume and open interest difference between the 4500 strikes and 4750. The fewer trades the less liquidity, the less accurate your brokerage's system's accounting for value.
"Look at the option sheets to see the volume and open interest difference between the 4500 strikes and 4750. The fewer trades the less liquidity, the less accurate your brokerage's system's accounting for value." - I'm not a professional options trader so don't take my word for it, but my understanding is that most serious brokerages use somewhat intelligent interpolation algorithms to assign options value, often also called "mark price". Which means that odd vs. round strike price doesn't matter, and liquidity or a particular options doesn't matter, nor does a particular single executed trade. The value is determined by interpolating trades of "neighboring" strike prices or maybe even adjacent expiration dates, and perhaps even other data like interest rate movements. (IB does not disclose their algorithm.)
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Kevin M
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Re: Let's Talk SPX Box Spreads

Post by Kevin M »

Got an immediate fill on the 8/19/22 box with strikes at 3,600 and 4,250 at 648.75 for gross yield of 2.34%, which is a spread of 54 bps over Treasury yield of 1.8%. Started 0.05 lower and waited about 5 minutes before increasing price.

Have been trying for a fill on the 9/16/22 box with same strikes, now at 647.30 for a gross yield of 2.625%, which is 42 bps higher than Treasury yield of 2.2%. Started at 0.10 or 0.15 lower, and have been walking price up every 5-10 minutes. Treasury yield actually is 2.16%, but I rounded up. Using that as the benchmark, I'll go to 647.35 for a 42 bps spread over T ... nope, still no immediate fill. I'll let this one sit for awhile.

Kevin
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nalor511
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Re: Let's Talk SPX Box Spreads

Post by nalor511 »

Nathan Drake wrote: Sun Jul 17, 2022 6:09 pm
muffins14 wrote: Sun Jul 17, 2022 11:26 am I’m considering re-consolidating at Fidelity after my IBKR adventure.

Any gotchas I need to know about with boxes (as loans) at fidelity vs boxes at IBKR? For example, is it more likely one leg of the box gets exercised at Fidelity?
I’m considering box spreads at Fidelity as well to get cheap margin

But I also don’t want it to obfuscate net worth tracking. Does the box spread show up as a liability or will Fidelity look like you have a large gain in net worth without a corresponding liability?

I have most funds at fidelity but use personal capital to track net worth
There's a (long) box spreads as loans thread with lots of good info, Fidelity is discussed toward the end viewtopic.php?t=344667&start=1050

And this is good too https://thefinancebuff.com/short-box-sp ... elity.html
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Kevin M
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Re: Let's Talk SPX Box Spreads

Post by Kevin M »

Kevin M wrote: Tue Jul 19, 2022 1:34 pm Have been trying for a fill on the 9/16/22 box with same strikes, now at 647.30 for a gross yield of 2.625%, which is 42 bps higher than Treasury yield of 2.2%. Started at 0.10 or 0.15 lower, and have been walking price up every 5-10 minutes. Treasury yield actually is 2.16%, but I rounded up. Using that as the benchmark, I'll go to 647.35 for a 42 bps spread over T ... nope, still no immediate fill. I'll let this one sit for awhile.
Got down to my minimum acceptable yield, and it wasn't filled after some time, so I cancelled the order and tried for the 10/21/2022 with same strikes. Walked the price up to 645.25, which would be a gross yield of 2.889% compared to Treasury yield of 2.487%, so a yield spread of 40 basis points. It was cancelled unfilled at the close.

Try again tomorrow.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
comeinvest
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Re: Let's Talk SPX Box Spreads

Post by comeinvest »

Kevin M wrote: Tue Jul 19, 2022 4:16 pm
Kevin M wrote: Tue Jul 19, 2022 1:34 pm Have been trying for a fill on the 9/16/22 box with same strikes, now at 647.30 for a gross yield of 2.625%, which is 42 bps higher than Treasury yield of 2.2%. Started at 0.10 or 0.15 lower, and have been walking price up every 5-10 minutes. Treasury yield actually is 2.16%, but I rounded up. Using that as the benchmark, I'll go to 647.35 for a 42 bps spread over T ... nope, still no immediate fill. I'll let this one sit for awhile.
Got down to my minimum acceptable yield, and it wasn't filled after some time, so I cancelled the order and tried for the 10/21/2022 with same strikes. Walked the price up to 645.25, which would be a gross yield of 2.889% compared to Treasury yield of 2.487%, so a yield spread of 40 basis points. It was cancelled unfilled at the close.

Try again tomorrow.

Kevin
The only things I can think of are:
- Maybe the treasuries yield curve fluctuates i.e. has some random noise at specific points of the curve.
- Maybe the treasuries yield curve is not the "correct" reference. Remember, we were not able to explain theoretically why we trade box spreads at a specific spread to treasuries. There are other curves (OIS? Libor? STIR (short-term interest rate) futures?) that might also play a role.
- I don't know how market makers net and balance their SPX options portfolios.
- Don't forget the opportunity cost of waiting. For a ca. 30 day loan, every day you don't get filled you pay broker margin interest (sell) or receive broker credit interest (buy) at unfavorable rates, and there is no guarantee that you get better box fills the next day.
- I've been more following a "it is what it is" approach, i.e. get filled at whatever rate I can get on a particular day. Simply because I have no evidence that waiting overnight or doing math to micro-manage the theoretical rates and therefore my order limits will benefit me on average in the long run. I'm not saying it's not worth it. I'm just saying I'm not sure if it's worth it, as I have no evidence.

I know you use BID qotes, but the ASK quotes from WSJ don't suggest a 0.4% rate difference between mid August and mid September, but rather ca. 0.3% if I average the two 08/15 expirations:
8/15/2022 1.500 99.3100 99.3140 -0.0040 1.705
8/15/2022 1.625 99.3140 100.0000 -0.6880 1.619
8/15/2022 7.250 100.1360 100.1420 -0.0100 1.239
9/15/2022 1.500 99.2920 99.2960 unch. 1.944
The fact that the two treasuries with low coupons with the same expiration have a 0.086% difference in ASK yields indicates that there is some noise.
I'm not sure why the 08/15 expiration with high coupon has such a low yield. Aren't coupon payments reflected in the yield calcs?
The (CMT?) yield curve indicates a 0.35% difference between 1-month and 2-month treasuries.
So your reference rates of 1.8% and 2.2% may be a little skewed.
My guess is your order was very close to being filled.
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Kevin M
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Re: Let's Talk SPX Box Spreads

Post by Kevin M »

Kevin M wrote: Tue Jul 19, 2022 4:16 pm
Kevin M wrote: Tue Jul 19, 2022 1:34 pm Have been trying for a fill on the 9/16/22 box with same strikes, now at 647.30 for a gross yield of 2.625%, which is 42 bps higher than Treasury yield of 2.2%. Started at 0.10 or 0.15 lower, and have been walking price up every 5-10 minutes. Treasury yield actually is 2.16%, but I rounded up. Using that as the benchmark, I'll go to 647.35 for a 42 bps spread over T ... nope, still no immediate fill. I'll let this one sit for awhile.
Got down to my minimum acceptable yield, and it wasn't filled after some time, so I cancelled the order and tried for the 10/21/2022 with same strikes. Walked the price up to 645.25, which would be a gross yield of 2.889% compared to Treasury yield of 2.487%, so a yield spread of 40 basis points. It was cancelled unfilled at the close.

Try again tomorrow.

Kevin
Tried the 9/16/22 again with same strikes, and didn't get filled at a minimum acceptable yield. I changed the spread to 600 to see if that might help, but it didn't. Got all the way down to 32 basis points over Treasury yield, and still didn't get filled. It's interesting to me that I got a 50 bps spread on the 1-month, but can't get the 2-month filled even at a 32 bps spread. At this yield, it's only a 15 bps taxable-equivalent yield (TEY) advantage over the Treasury.

As to waiting, if I can get a decent spread over the Treasury yield, I might as well buy the Treasury.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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Kevin M
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Re: Let's Talk SPX Box Spreads

Post by Kevin M »

comeinvest wrote: Tue Jul 19, 2022 9:52 pm The only things I can think of are:
- Maybe the treasuries yield curve fluctuates i.e. has some random noise at specific points of the curve.
- Maybe the treasuries yield curve is not the "correct" reference. Remember, we were not able to explain theoretically why we trade box spreads at a specific spread to treasuries. There are other curves (OIS? Libor? STIR (short-term interest rate) futures?) that might also play a role.
- I don't know how market makers net and balance their SPX options portfolios.
- Don't forget the opportunity cost of waiting. For a ca. 30 day loan, every day you don't get filled you pay broker margin interest (sell) or receive broker credit interest (buy) at unfavorable rates, and there is no guarantee that you get better box fills the next day.
- I've been more following a "it is what it is" approach, i.e. get filled at whatever rate I can get on a particular day. Simply because I have no evidence that waiting overnight or doing math to micro-manage the theoretical rates and therefore my order limits will benefit me on average in the long run. I'm not saying it's not worth it. I'm just saying I'm not sure if it's worth it, as I have no evidence.

I know you use BID qotes, but the ASK quotes from WSJ don't suggest a 0.4% rate difference between mid August and mid September, but rather ca. 0.3% if I average the two 08/15 expirations:
8/15/2022 1.500 99.3100 99.3140 -0.0040 1.705
8/15/2022 1.625 99.3140 100.0000 -0.6880 1.619
8/15/2022 7.250 100.1360 100.1420 -0.0100 1.239
9/15/2022 1.500 99.2920 99.2960 unch. 1.944
The fact that the two treasuries with low coupons with the same expiration have a 0.086% difference in ASK yields indicates that there is some noise.
I'm not sure why the 08/15 expiration with high coupon has such a low yield. Aren't coupon payments reflected in the yield calcs?
The (CMT?) yield curve indicates a 0.35% difference between 1-month and 2-month treasuries.
So your reference rates of 1.8% and 2.2% may be a little skewed.
My guess is your order was very close to being filled.
I don't compare to bid yields, I use ask yields, since I'm buying. If I were doing a short box, I probably would use the bid yield.

The Treasury yield curve definitely is "noisy", but that doesn't matter to me, nor does it matter to me that Treasuries may not be the correct reference. What matters to me is how much of a yield premium I can get over a Treasury with the same or very close maturity. My reference is the highest yield for a maturity that's within a few days of the expiration date. So for the yields you list, I definitely would not use the 7.250% coupon one with the lowest yield for comparison--I would use the 8/15/22 Treasury with the highest yield.

High coupon Treasuries always have lower yields than their maturity neighbors. The high coupon results in a lower duration than a lower coupon security of the same maturity, so lower yield is expected. We see this across the yield curve.

I agree with the "take what I can get" approach, but I would just buy the Treasury if I can't get a reasonable yield spread on the box. When I get down to 15 basis points of TEY yield advantage and it still doesn't get filled, I'm just not interested. I'll probably try other maturities tomorrow.

Kevin
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Kbg
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Re: Let's Talk SPX Box Spreads

Post by Kbg »

Are you factoring tax effects in your decision (e.g. interest at marginal tax rates vs. 60/40 LT/ST capital gains rates)?
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Kevin M
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Re: Let's Talk SPX Box Spreads

Post by Kevin M »

Kbg wrote: Thu Jul 21, 2022 11:12 am Are you factoring tax effects in your decision (e.g. interest at marginal tax rates vs. 60/40 LT/ST capital gains rates)?
In a taxable account, yes, and commission on the box. It turns out that for me, the state tax exemption of a Treasury is more valuable than the 60% LTCG for the box. LTCG is taxed fully in CA, while the state tax exemption for me is 9.3%.

For example, for the box I'm trying to buy now, the Treasury yield is 2.52%, which for me is a TEY of 2.86%. The box yield would be gross 2.949%, net after commission 2.933%, and net TEY of 3.113%. So the gross yield spread over Treasury would be 0.43%, but the net TEY spread is only 0.25%.

Kevin
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Kevin M
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Re: Let's Talk SPX Box Spreads

Post by Kevin M »

Kevin M wrote: Wed Jul 20, 2022 8:26 pm The Treasury yield curve definitely is "noisy", <snip>

High coupon Treasuries always have lower yields than their maturity neighbors. The high coupon results in a lower duration than a lower coupon security of the same maturity, so lower yield is expected. We see this across the yield curve.
Here is the noisy Treasury yield curve out to 2-year maturity:

Image

The big spikes down are the high coupon Treasuries and STRIPS (zero-coupon). The 8/15/2022 7.250% Treasury actually is negative now, at -0.509% (I cut off the vertical axis at 0 to see better resolution of the spikes). Bizarre.

Although it's true that high coupon Treasuries always have lower yields than adjacent maturities, duration does not appear to explain it. I calculated the durations of all Treasuries up to 2-year maturity, and the duration of the highest coupon issue is the same as the lowest coupon issue for shorter maturities. I think this is because there are no coupon payments before maturity, in which the higher coupon rate does not affect duration. Durations for issues with maturity longer than 6 months is slightly different for different coupon rates, as expected.

Example:

There are five Treasuries maturing 11/15/2022, with coupon rates from 0% to 7.625%. High yield is 2.63% for a bill (0% cpn), and low yield is 1.808% for the 7.625% coupon issue. Duration for all five is 3.78 months and the term to maturity is 3.81 months.

But, yield for the 11/15/2022 STRIPS (stripped interest) with 0% coupon is also low at 2.101%.

Since duration should have the opposite affect on high coupon and zero-coupon issues, there must be something else going on here.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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Kevin M
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Re: Let's Talk SPX Box Spreads

Post by Kevin M »

Kevin M wrote: Wed Jul 20, 2022 4:15 pm
Kevin M wrote: Tue Jul 19, 2022 4:16 pm
Kevin M wrote: Tue Jul 19, 2022 1:34 pm Have been trying for a fill on the 9/16/22 box with same strikes, now at 647.30 for a gross yield of 2.625%, which is 42 bps higher than Treasury yield of 2.2%. Started at 0.10 or 0.15 lower, and have been walking price up every 5-10 minutes. Treasury yield actually is 2.16%, but I rounded up. Using that as the benchmark, I'll go to 647.35 for a 42 bps spread over T ... nope, still no immediate fill. I'll let this one sit for awhile.
Got down to my minimum acceptable yield, and it wasn't filled after some time, so I cancelled the order and tried for the 10/21/2022 with same strikes. Walked the price up to 645.25, which would be a gross yield of 2.889% compared to Treasury yield of 2.487%, so a yield spread of 40 basis points. It was cancelled unfilled at the close.

Try again tomorrow.

Kevin
Tried the 9/16/22 again with same strikes, and didn't get filled at a minimum acceptable yield. I changed the spread to 600 to see if that might help, but it didn't. Got all the way down to 32 basis points over Treasury yield, and still didn't get filled. It's interesting to me that I got a 50 bps spread on the 1-month, but can't get the 2-month filled even at a 32 bps spread. At this yield, it's only a 15 bps taxable-equivalent yield (TEY) advantage over the Treasury.

As to waiting, if I can get a decent spread over the Treasury yield, I might as well buy the Treasury.

Kevin
Another day of no fills. Today I tried the 11/22/2022 11/18/2022 expiration with strikes at 3,700 and 4,200. Walked price up to 495.25, which would have been a gross yield of 2.80% compared to 2.52% for the Treasury, so a 28 basis point gross yield spread. This is only a 9 basis point TEY advantage over the Treasury, so going lower makes no sense to me. If I can't get these filled, I'll just buy the Treasury.

Kevin
Last edited by Kevin M on Fri Jul 22, 2022 1:24 pm, edited 1 time in total.
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comeinvest
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Re: Let's Talk SPX Box Spreads

Post by comeinvest »

Kevin M wrote: Thu Jul 21, 2022 2:59 pm
Kevin M wrote: Wed Jul 20, 2022 8:26 pm The Treasury yield curve definitely is "noisy", <snip>

High coupon Treasuries always have lower yields than their maturity neighbors. The high coupon results in a lower duration than a lower coupon security of the same maturity, so lower yield is expected. We see this across the yield curve.
Although it's true that high coupon Treasuries always have lower yields than adjacent maturities, duration does not appear to explain it. I calculated the durations of all Treasuries up to 2-year maturity, and the duration of the highest coupon issue is the same as the lowest coupon issue for shorter maturities. I think this is because there are no coupon payments before maturity, in which the higher coupon rate does not affect duration. Durations for issues with maturity longer than 6 months is slightly different for different coupon rates, as expected.

Example:

There are five Treasuries maturing 11/15/2022, with coupon rates from 0% to 7.625%. High yield is 2.63% for a bill (0% cpn), and low yield is 1.808% for the 7.625% coupon issue. Duration for all five is 3.78 months and the term to maturity is 3.81 months.

But, yield for the 11/15/2022 STRIPS (stripped interest) with 0% coupon is also low at 2.101%.

Since duration should have the opposite affect on high coupon and zero-coupon issues, there must be something else going on here.

Kevin
Before we understand this, you can forget your math for box trades. If you just go by bid or ask yields, have you checked if there are actual trades happening, and what the yields of the trades are?
Regarding your chart: I think it makes more sense to plot the yields against durations, not maturities.
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Kevin M
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Re: Let's Talk SPX Box Spreads

Post by Kevin M »

Kevin M wrote: Thu Jul 21, 2022 6:04 pm Another day of no fills. Today I tried the 11/22/2022 11/18/2022 expiration with strikes at 3,700 and 4,200. Walked price up to 495.25, which would have been a gross yield of 2.80% compared to 2.52% for the Treasury, so a 28 basis point gross yield spread. This is only a 9 basis point TEY advantage over the Treasury, so going lower makes no sense to me. If I can't get these filled, I'll just buy the Treasury.
Tried again today for same box, with price up to 495.30, which would be only 9 basis points of extra TEY above the Treasury at 2.58%. So, I cancelled the order and bought 65 of the 11/15/2022 Treasury bill at a yield of 2.58% (TEY = 2.93%); it was filled in about 1.5 minutes.

Kevin
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comeinvest
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Re: Let's Talk SPX Box Spreads

Post by comeinvest »

Kevin M wrote: Fri Jul 22, 2022 1:27 pm
Kevin M wrote: Thu Jul 21, 2022 6:04 pm Another day of no fills. Today I tried the 11/22/2022 11/18/2022 expiration with strikes at 3,700 and 4,200. Walked price up to 495.25, which would have been a gross yield of 2.80% compared to 2.52% for the Treasury, so a 28 basis point gross yield spread. This is only a 9 basis point TEY advantage over the Treasury, so going lower makes no sense to me. If I can't get these filled, I'll just buy the Treasury.
Tried again today for same box, with price up to 495.30, which would be only 9 basis points of extra TEY above the Treasury at 2.58%. So, I cancelled the order and bought 65 of the 11/15/2022 Treasury bill at a yield of 2.58% (TEY = 2.93%); it was filled in about 1.5 minutes.

Kevin
Over the last year or so that I followed the threads and websites about box trades, people reported spreads (buying and selling) to treasuries in the range or ca. 0.3% - 0.5%. I also observed an effective (not quoted) buy/sell spread of 0.1% - 0.2%. Putting everything together, I think you can expect to get about 0.3% above treasuries if you buy a box, but not necessarily more. The very short maturity of about a month may be an anomaly of either the treasury of the box; I'm not sure if boxes less than a month make sense given the transaction cost.
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Re: Let's Talk SPX Box Spreads

Post by muffins14 »

so much for my re-consolidation back to Fidelity from IBKR -- I was approved only for Tier 1 options trading due to "not enough experience", while Tier 2 is needed for spreads.

One place on the website says I can re-apply in 30 days, and another place says 180 days. So I guess I'm in IBKR for 6 more months then.
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Nathan Drake
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Re: Let's Talk SPX Box Spreads

Post by Nathan Drake »

muffins14 wrote: Mon Jul 25, 2022 7:59 am so much for my re-consolidation back to Fidelity from IBKR -- I was approved only for Tier 1 options trading due to "not enough experience", while Tier 2 is needed for spreads.

One place on the website says I can re-apply in 30 days, and another place says 180 days. So I guess I'm in IBKR for 6 more months then.
What does experience entail?

Just buying some options every now and then?
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Re: Let's Talk SPX Box Spreads

Post by muffins14 »

Nathan Drake wrote: Mon Jul 25, 2022 11:49 am
muffins14 wrote: Mon Jul 25, 2022 7:59 am so much for my re-consolidation back to Fidelity from IBKR -- I was approved only for Tier 1 options trading due to "not enough experience", while Tier 2 is needed for spreads.

One place on the website says I can re-apply in 30 days, and another place says 180 days. So I guess I'm in IBKR for 6 more months then.
What does experience entail?

Just buying some options every now and then?
I truthfully answered their questions on “for how long have you traded options” and that was less than 1 year. I guess their automated system rejected me as a result
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Kevin M
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Re: Let's Talk SPX Box Spreads

Post by Kevin M »

Today I got an immediate fill on 1 of the Oct 21, 2022 box at strikes 3,700 and 4,200 at a price of 496.75. This is a gross yield of 2.81% compared to Treasury yield of 2.365%, so a gross yield premium of 44 bps. Net TEY yield premium is 27 bps, with box TEY of 2.96% and Treasury TEY of 2.69%.

I didn't mess around starting at a higher price today, since I don't have time, so this was my starting order, and I was happy with a 44 bps gross yield spread.

Kevin
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Re: Let's Talk SPX Box Spreads

Post by nalor511 »

muffins14 wrote: Mon Jul 25, 2022 7:59 am so much for my re-consolidation back to Fidelity from IBKR -- I was approved only for Tier 1 options trading due to "not enough experience", while Tier 2 is needed for spreads.

One place on the website says I can re-apply in 30 days, and another place says 180 days. So I guess I'm in IBKR for 6 more months then.
I re applied (and was approved) after about a week. Tier 3 was needed for box spreads when I applied. You definitely need more experience to get approved at Fido than at IBKR. BUT you can ask for tier "2+" which is just tier 2 plus spreads, but I think you need to call)
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Re: Let's Talk SPX Box Spreads

Post by Kevin M »

Just got an immediate fill on the Sep 16 22 box with strikes at 3,700 and 4,200 at a price of 498.25. This is a gross yield of 2.62% compared to Treasury yield of 2.1% (9/15/22), so a gross yield spread of 52 bps. My net TEY spread is 35 bps, with box net TEY at 2.73% and Treasury TEY at 2.38%.

As with yesterday's purchase, I got an execution at my first price, but I started with a higher yield spread today.

Weird how I've gotten immediate fills with good yield spreads over the last two days, while last week I couldn't get a fill at significantly lower yield spreads.

Kevin
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Re: Let's Talk SPX Box Spreads

Post by comeinvest »

Kevin M wrote: Thu Jul 28, 2022 12:16 pm Just got an immediate fill on the Sep 16 22 box with strikes at 3,700 and 4,200 at a price of 498.25. This is a gross yield of 2.62% compared to Treasury yield of 2.1% (9/15/22), so a gross yield spread of 52 bps. My net TEY spread is 35 bps, with box net TEY at 2.73% and Treasury TEY at 2.38%.

As with yesterday's purchase, I got an execution at my first price, but I started with a higher yield spread today.

Weird how I've gotten immediate fills with good yield spreads over the last two days, while last week I couldn't get a fill at significantly lower yield spreads.

Kevin
But what was your opportunity cost of waiting?
If you "lost" 1 week out of the 8 weeks to maturity, and got T-bill rates minus 0.5% deposit interest during that time instead of ca. 0.5% above T-bill rates with SPX boxes, then you "lost" the equivalent ca. 0.125% of APY if you pro-rate over the 8 weeks period. Of course everybody's situation is different, I know you purchased a treasury bond instead so maybe you didn't "wait" for the best fill, etc. But just as an example. Can you remind me what was the rate that you tried, and what do you think was the rate you could have got fills at, last week?
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Re: Let's Talk SPX Box Spreads

Post by comeinvest »

I got a 2.644% APY immediate fill with price improvement selling a 3000-5000 spread with Aug 19 expiration, and a 2.41% APY immediate fill without price improvement selling a 3000-4000 spread with Aug 31 expiration. Immediate fills without walking the limits, as I was in a rush. Commissions disregarded.
I think I got a worse deal with the Aug 19 spread than with the Aug31, as the treasury curve is upward sloping in that segment. Maybe trading box spreads shorter than 4 weeks is not advisable?
Treasury spreads seem to be at ca. 2.3% in that entire segment, so did I get very good deals overall? Surprisingly, my APY spreads to treasuries selling spreads seems to be lower than Kevin sometimes gets for buying spreads, although it looks like other times Kevin doesn't get fills in the 0.1-0.3% above treasury range.

@ Kevin: do you have any experience or data points with spreads < 4 weeks to maturity?
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Re: Let's Talk SPX Box Spreads

Post by Kevin M »

comeinvest wrote: Sat Jul 30, 2022 4:39 am I got a 2.644% APY immediate fill with price improvement selling a 3000-5000 spread with Aug 19 expiration, and a 2.41% APY immediate fill without price improvement selling a 3000-4000 spread with Aug 31 expiration. Immediate fills without walking the limits, as I was in a rush. Commissions disregarded.
I think I got a worse deal with the Aug 19 spread than with the Aug31, as the treasury curve is upward sloping in that segment. Maybe trading box spreads shorter than 4 weeks is not advisable?
Treasury spreads seem to be at ca. 2.3% in that entire segment, so did I get very good deals overall? Surprisingly, my APY spreads to treasuries selling spreads seems to be lower than Kevin sometimes gets for buying spreads, although it looks like other times Kevin doesn't get fills in the 0.1-0.3% above treasury range.

@ Kevin: do you have any experience or data points with spreads < 4 weeks to maturity?
Thanks for sharing.

There is an 8/18/22 T bill that had a 2.04% yield at Fidelity at 3:30 pm ET on Friday, so 2.64% gross is a spread of 60 basis points. That's excellent--about the highest I have ever gotten, if even that.

The high yield for a Treasury maturing on 8/31/22 was 1.82%, but there is a bill maturing 8/30/22 with a yield of 2.15%, so I would use that for comparison. So at 2.41% the gross spread is 26 bps, which is lower than I like. When it gets that low, the TEY spread for me is so small it doesn't make much sense.

Treasury quotes are for the best ask yield, typically for larger quantities, but the large/small-qty spread typically is 2 bps or less.

Are you sure you didn't get the yields reversed? Your comment about getting a worse deal on the 8/19 doesn't make sense otherwise.

The shortest maturity I've bought is 1 month.

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Re: Let's Talk SPX Box Spreads

Post by Kevin M »

Kevin M wrote: Sat Jul 30, 2022 12:04 pm
comeinvest wrote: Sat Jul 30, 2022 4:39 am I got a 2.644% APY immediate fill with price improvement selling a 3000-5000 spread with Aug 19 expiration, and a 2.41% APY immediate fill without price improvement selling a 3000-4000 spread with Aug 31 expiration. Immediate fills without walking the limits, as I was in a rush. Commissions disregarded.
I think I got a worse deal with the Aug 19 spread than with the Aug31, as the treasury curve is upward sloping in that segment. Maybe trading box spreads shorter than 4 weeks is not advisable?
Treasury spreads seem to be at ca. 2.3% in that entire segment, so did I get very good deals overall? Surprisingly, my APY spreads to treasuries selling spreads seems to be lower than Kevin sometimes gets for buying spreads, although it looks like other times Kevin doesn't get fills in the 0.1-0.3% above treasury range.

@ Kevin: do you have any experience or data points with spreads < 4 weeks to maturity?
<snip>
Are you sure you didn't get the yields reversed? Your comment about getting a worse deal on the 8/19 doesn't make sense otherwise.
Sorry, I missed the part about you selling the spreads, since all I do is buy. So you are looking for the smallest spread to Treasuries, while I am looking for the largest spread. Now I understand your comments.
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Re: Let's Talk SPX Box Spreads

Post by Kevin M »

^Also, I compare to ask yield since I am buying, but I think I would compare to bid yield if selling. However, I can always just buy the Treasury at the ask yield, but I don't think you can sell the Treasury short at the bid yield, can you? As a seller, I would compare to whatever rate I'd have to pay for a comparable loan, margin interest, or shorting Treasuries or something similar.

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Re: Let's Talk SPX Box Spreads

Post by comeinvest »

Kevin M wrote: Sat Jul 30, 2022 12:40 pm ^Also, I compare to ask yield since I am buying, but I think I would compare to bid yield if selling. However, I can always just buy the Treasury at the ask yield, but I don't think you can sell the Treasury short at the bid yield, can you? As a seller, I would compare to whatever rate I'd have to pay for a comparable loan, margin interest, or shorting Treasuries or something similar.

Kevin
I'm relatively sure that I can't do better than selling box spreads, so there is no point for me to compare.

What is the commission of buying treasuries?
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Re: Let's Talk SPX Box Spreads

Post by Kevin M »

comeinvest wrote: Mon Aug 01, 2022 4:24 am
Kevin M wrote: Sat Jul 30, 2022 12:40 pm ^Also, I compare to ask yield since I am buying, but I think I would compare to bid yield if selling. However, I can always just buy the Treasury at the ask yield, but I don't think you can sell the Treasury short at the bid yield, can you? As a seller, I would compare to whatever rate I'd have to pay for a comparable loan, margin interest, or shorting Treasuries or something similar.

Kevin
I'm relatively sure that I can't do better than selling box spreads, so there is no point for me to compare.

What is the commission of buying treasuries?
In other words, you are confirming that you cannot borrow at Treasury rates. Since I can loan at Treasury rates, it makes sense for me to compare.

No commissions, fees or markups to buy or sell Treasuries at Fidelity, Vanguard or Schwab. Of course the dealers are making money on the bid/ask spread in the secondary market, but that typically is quite small for Treasuries.

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Re: Let's Talk SPX Box Spreads

Post by Kevin M »

Got an immediate fill on purchase of one Oct 21, 2022 box at 993.85 with strikes at 3,500 and 4,500. This is a gross yield of 2.82% compared to 10/25/2022 Treasury yield of 2.39%, for a gross yield spread of 43 bps. Net yield is 2.81% for a 42 bps net spread. This is in an IRA, so TEY is irrelevant.

I started about 0.20 lower and walked price up in 0.05 increments until I got an immediate fill. I did not wait after placing each order if it didn't get an immediate fill.

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Re: Let's Talk SPX Box Spreads

Post by Kevin M »

Immediate fill in IRA for 8/19/22 box with 3,700 and 4,200 strikes at 499.40, which is gross yield of 2.74% for 71 bps over Treasury yield of 2.035%, and net yield of 2.62% for net 58 bps over Treasury. By far the highest Treasury yield spread I've ever gotten--guess it's because the maturity is so short. Just parking cash waiting for higher TIPS yields. Order was executed at first price entered, which always makes me think I should have tried a lower price first.

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Re: Let's Talk SPX Box Spreads

Post by indexfundfan »

Kevin M wrote: Tue Aug 02, 2022 12:13 pm Immediate fill in IRA for 8/19/22 box with 3,700 and 4,200 strikes at 499.40, which is gross yield of 2.74% for 71 bps over Treasury yield of 2.035%, and net yield of 2.62% for net 58 bps over Treasury. By far the highest Treasury yield spread I've ever gotten--guess it's because the maturity is so short. Just parking cash waiting for higher TIPS yields. Order was executed at first price entered, which always makes me think I should have tried a lower price first.
It's interesting to see you do all these short term boxes. I think your gain for this one is 60 - 2.6 = $57.40 at maturity?

I guess you could have bought FZDXX and come out the same or a little higher since the yield of FZDXX is increasing.
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Re: Let's Talk SPX Box Spreads

Post by Kevin M »

indexfundfan wrote: Tue Aug 02, 2022 12:37 pm
Kevin M wrote: Tue Aug 02, 2022 12:13 pm Immediate fill in IRA for 8/19/22 box with 3,700 and 4,200 strikes at 499.40, which is gross yield of 2.74% for 71 bps over Treasury yield of 2.035%, and net yield of 2.62% for net 58 bps over Treasury. By far the highest Treasury yield spread I've ever gotten--guess it's because the maturity is so short. Just parking cash waiting for higher TIPS yields. Order was executed at first price entered, which always makes me think I should have tried a lower price first.
It's interesting to see you do all these short term boxes. I think your gain for this one is 60 - 2.6 = $57.40 at maturity?

I guess you could have bought FZDXX and come out the same or a little higher since the yield of FZDXX is increasing.
Maybe. FZDXX 7-day SEC yield yesterday was 1.9%, and I got 2.6% net. FZDXX yield would have to get to 2.6% in about 8 days and keep increasing from there to match it after 16 days. With the effective fed funds rate at 2.3%, I don't see that happening, but we shall see.

Yes, the dollar amounts are always small for short term, but it's fun and it keeps my cash working a little harder while waiting for better TIPS yields or higher short term yields, which we can reasonably expect with the current outlook.

Interestingly, comeinvest took the opposite side of this trade (last week I think), and commented on the relatively high yield of 2.64%, and was wondering if it was because of the very short term.

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Re: Let's Talk SPX Box Spreads

Post by indexfundfan »

Kevin M wrote: Tue Aug 02, 2022 1:26 pm
indexfundfan wrote: Tue Aug 02, 2022 12:37 pm
Kevin M wrote: Tue Aug 02, 2022 12:13 pm Immediate fill in IRA for 8/19/22 box with 3,700 and 4,200 strikes at 499.40, which is gross yield of 2.74% for 71 bps over Treasury yield of 2.035%, and net yield of 2.62% for net 58 bps over Treasury. By far the highest Treasury yield spread I've ever gotten--guess it's because the maturity is so short. Just parking cash waiting for higher TIPS yields. Order was executed at first price entered, which always makes me think I should have tried a lower price first.
It's interesting to see you do all these short term boxes. I think your gain for this one is 60 - 2.6 = $57.40 at maturity?

I guess you could have bought FZDXX and come out the same or a little higher since the yield of FZDXX is increasing.
Maybe. FZDXX 7-day SEC yield yesterday was 1.9%, and I got 2.6% net. FZDXX yield would have to get to 2.6% in about 8 days and keep increasing from there to match it after 16 days. With the effective fed funds rate at 2.3%, I don't see that happening, but we shall see.

Yes, the dollar amounts are always small for short term, but it's fun and it keeps my cash working a little harder while waiting for better TIPS yields or higher short term yields, which we can reasonably expect with the current outlook.

Interestingly, comeinvest took the opposite side of this trade (last week I think), and commented on the relatively high yield of 2.64%, and was wondering if it was because of the very short term.

Kevin
I guess you are trading for the "fun" of it.

In the rising rate environment, it is more accurate to look at the 1-day SEC yield, which was 2.11% for FZDXX yesterday. But still you're right. FZDXX is unlikely to give you the 2.62% over the same period of time.
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Re: Let's Talk SPX Box Spreads

Post by Kevin M »

indexfundfan wrote: Tue Aug 02, 2022 1:35 pm I guess you are trading for the "fun" of it.
Not really. I was just saying that that was one aspect of it, including learning more about box spreads. I'm interested in what kind of yield spreads I can get over Treasuries at various maturities, and was quite surprised at this one.
indexfundfan wrote: Tue Aug 02, 2022 1:35 pm In the rising rate environment, it is more accurate to look at the 1-day SEC yield, which was 2.11% for FZDXX yesterday. But still you're right. FZDXX is unlikely to give you the 2.62% over the same period of time.
Agreed. I couldn't find the 1-day SEC yield with a quick look. I still have some in FZDXX in case TIPS yields pop in the next 16 days.

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Re: Let's Talk SPX Box Spreads

Post by comeinvest »

Kevin M wrote: Tue Aug 02, 2022 12:13 pm Immediate fill in IRA for 8/19/22 box with 3,700 and 4,200 strikes at 499.40, which is gross yield of 2.74% for 71 bps over Treasury yield of 2.035%, and net yield of 2.62% for net 58 bps over Treasury. By far the highest Treasury yield spread I've ever gotten--guess it's because the maturity is so short. Just parking cash waiting for higher TIPS yields. Order was executed at first price entered, which always makes me think I should have tried a lower price first.

Kevin
As per my post a few days ago, on July 29th I got 2.644% with price improvement, i.e. effectively a market order, selling an Aug 19 box. Short-term interest rates per 1-month SOFR futures chart (Sep 1st expiration) didn't change much the last week, so the trades are comparable. (I also got 2.41% APY selling Aug 31 expiration, even though the treasury yield curve slopes upward.) What does this tell us? I'm a bit confused. It should be the other way around, if we assume that the dealers have an internal margin between APYs that they fill on the buy and sell side. The market for short-term box spreads must have moved in relation to treasuries as well as in absolute terms, between Friday July 29th and today.

Are you sure you bought an Aug 19 box (only about 2 weeks to expiration), and your calcs are correct?
Here are my order parameters:
Aug 19 expiration, trade date 07/29/2022, 3000-5000 spread, filled at 1997
Aug 31 expiration, trade date 07/29/2022, 3000-4000 spread, filled at 997.85
Feel free to verify.

Image

@adamhg : I can't see my trade of the Aug 19 box on boxtrades.com. Can you please look into that? There are large trades on 07/29 listed on boxtrades.com between 2.65% and 2.79%, and smaller outliers at 2.32% and 2.52%.

On another note, why are my commissions ($6.56, $6.38) at IB so high? What are your all-in commissions for SPX boxes?
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Re: Let's Talk SPX Box Spreads

Post by Kevin M »

comeinvest wrote: Tue Aug 02, 2022 7:06 pm
Kevin M wrote: Tue Aug 02, 2022 12:13 pm Immediate fill in IRA for 8/19/22 box with 3,700 and 4,200 strikes at 499.40, which is gross yield of 2.74% for 71 bps over Treasury yield of 2.035%, and net yield of 2.62% for net 58 bps over Treasury. By far the highest Treasury yield spread I've ever gotten--guess it's because the maturity is so short. Just parking cash waiting for higher TIPS yields. Order was executed at first price entered, which always makes me think I should have tried a lower price first.

Kevin
As per my post a few days ago, on July 29th I got 2.644% with price improvement, i.e. effectively a market order, selling an Aug 19 box. Short-term interest rates per 1-month SOFR futures chart (Sep 1st expiration) didn't change much the last week, so the trades are comparable. (I also got 2.41% APY selling Aug 31 expiration, even though the treasury yield curve slopes upward.) What does this tell us? I'm a bit confused. It should be the other way around, if we assume that the dealers have an internal margin between APYs that they fill on the buy and sell side. The market for short-term box spreads must have moved in relation to treasuries as well as in absolute terms, between Friday July 29th and today.

Are you sure you bought an Aug 19 box (only about 2 weeks to expiration), and your calcs are correct?
Here are my order parameters:
Aug 19 expiration, trade date 07/29/2022, 3000-5000 spread, filled at 1997
Aug 31 expiration, trade date 07/29/2022, 3000-4000 spread, filled at 997.85
Feel free to verify.

Image

@adamhg : I can't see my trade of the Aug 19 box on boxtrades.com. Can you please look into that? There are large trades on 07/29 listed on boxtrades.com between 2.65% and 2.79%, and smaller outliers at 2.32% and 2.52%.

On another note, why are my commissions ($6.56, $6.38) at IB so high? What are your all-in commissions for SPX boxes?
One factor that might explain the apparent discrepancy in yields for 8/19 and 8/31 is that 8/19 is a Friday, so funds aren't available until Monday, while 8/31 is a Wednesday, so 9/1 settlement. I use the expiration date in my yield/IRR calculations, just like everyone uses maturity date in calculating bond yields, regardless what day of the week it is.

In the past, I noticed slightly higher yields for Treasuries that matured on the weekend, which I assumed was because of the settlement delay. I haven't looked at this in a few years.

Yes, I'm sure it was an 8/19 box, and I'm confident in my calculations based on the expiration date.

All in commission at Fidelity is $2.72 for quantity 1, so $0.67 per leg. The preview screen shows $2.60 commission (0.65 per leg), but they tack on 0.03 fee per leg in addition to that.

Today I'm going to look at other expiration dates--not just the 3rd Friday ones.

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Re: Let's Talk SPX Box Spreads

Post by Kevin M »

^OK, I would've liked 9/2/22 expiration, but that's also a Friday, so the closest expiration that would settle the next day is the 8/31/2022 (same as comeinvest sold last week). I got an immediate fill on the 8/31 with 3,800 and 4,300 strikes at 499.05. This is a gross yield of 2.57%, which is 46 bps over 8/30/22 Treasury yield of 2.015% (for min qty 1), and 2.50% net yield for a 38 bps net yield spread. TEY of the box is 2.65% compared to 2.40% for the Treasury, so a TEY spread of 25 bps.

I started at 498.90 and walked it up in 0.05 increments until I got the immediate fill.

So, like comeinvest, I got a lower yield for 8/31 than than the 2.74% gross yield I got for the 8/19 box yesterday, and I got a much smaller yield spread over the Treasury. Again, I think this is because of the mid-week settlement vs. Friday settlement.

I also want to note that there is an 8/31/2022 Treasury note, but it had a much lower yield than the 8/30/2022 bill; I compare to the highest yield for a maturity that is close to the expiration date.

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Re: Let's Talk SPX Box Spreads

Post by DelMar »

Hi Kevin, I'm a follower of your exploits across Nominals, TIPS, & Box Spreads and am extremely appreciative of how you share, in detail, your journey of doing, learning & sharing.

Like you, I'm considering the viability of utilizing SPX Box Spreads to eek out just a bit more yield than other "no-risk" alternatives. I'm curious how the feature of the zero state tax feature of treasuries plays into your analysis as compared to SPX Box Spreads.

Are you in a state that has minimal/zero state tax obligations that make this an apples to apples comparison. Or, do you live in a state where that is a consideration and, if so, how are you reconciling?

I'm in California. Currently I'm building positions in Treasuries that will represent a 10 year living expense bucket. On my current track I'll eventually have a ladder of 12 rungs of 1 year bills at 250K each. The amounts are sizable, I'm confident in my ability to execute error free trades and, like you, I have time to spend on learning, doing & sharing.

In the weeks/months ahead I'd like to determine if the Box Spread juice is worth the squeeze in my case. If so, then upon maturation of my nominals I'll begin dipping my toes in those waters.

Rob
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Re: Let's Talk SPX Box Spreads

Post by comeinvest »

Kevin M wrote: Wed Aug 03, 2022 1:06 pm ^OK, I would've liked 9/2/22 expiration, but that's also a Friday, so the closest expiration that would settle the next day is the 8/31/2022 (same as comeinvest sold last week). I got an immediate fill on the 8/31 with 3,800 and 4,300 strikes at 499.05. This is a gross yield of 2.57%, which is 46 bps over 8/30/22 Treasury yield of 2.015% (for min qty 1), and 2.50% net yield for a 38 bps net yield spread. TEY of the box is 2.65% compared to 2.40% for the Treasury, so a TEY spread of 25 bps.

I started at 498.90 and walked it up in 0.05 increments until I got the immediate fill.

So, like comeinvest, I got a lower yield for 8/31 than than the 2.74% gross yield I got for the 8/19 box yesterday, and I got a much smaller yield spread over the Treasury. Again, I think this is because of the mid-week settlement vs. Friday settlement.

I also want to note that there is an 8/31/2022 Treasury note, but it had a much lower yield than the 8/30/2022 bill; I compare to the highest yield for a maturity that is close to the expiration date.

Kevin
Adjusted for the settlement dates due to the weekend, the yield on my Aug 31 box was 2.57% instead of 2.41%. That explains most, but not all of the difference to the Aug 19 trade at 2.64%. (Aug 19 needs no adjustment as both trade date and expiration are Fridays.)
We still have not explained why you get higher yields buying than I get selling spreads. It should be the other way around. Treasuries didn't change much in that time period. Random box spread market fluctuations? If we attribute it to random noise, then I'm not going to try to further reverse-engineer that market. I just take whatever I get on a day when I need box spread financing or box spread investment.
I think it would be better if you normalize all yield calcs to reflect settlement dates, as that is the economically meaningful number and makes them more comparable. If you want to compare to treasuries, adjust the treasury yield too if it expires on a weekend. Then everything is 1:1 comparable and reflects economic reality i.e. is consistent with banks' and brokers' deposit and margin interest rate calculations.
Last edited by comeinvest on Wed Aug 03, 2022 2:33 pm, edited 1 time in total.
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Re: Let's Talk SPX Box Spreads

Post by comeinvest »

Kevin M wrote: Fri Jul 22, 2022 1:27 pm
Kevin M wrote: Thu Jul 21, 2022 6:04 pm Another day of no fills. Today I tried the 11/22/2022 11/18/2022 expiration with strikes at 3,700 and 4,200. Walked price up to 495.25, which would have been a gross yield of 2.80% compared to 2.52% for the Treasury, so a 28 basis point gross yield spread. This is only a 9 basis point TEY advantage over the Treasury, so going lower makes no sense to me. If I can't get these filled, I'll just buy the Treasury.
Tried again today for same box, with price up to 495.30, which would be only 9 basis points of extra TEY above the Treasury at 2.58%. So, I cancelled the order and bought 65 of the 11/15/2022 Treasury bill at a yield of 2.58% (TEY = 2.93%); it was filled in about 1.5 minutes.

Kevin
You didn't get a fill at ca. 2.8% on 07/21 and 07/22. Looking at boxtrades.com, there were large trades @ 2.95% and 2.99% on 07/20 and on 07/25. It think you were close to getting a fill, and maybe it was also attributable to random market fluctuations. I don't know if supply and demand for particular expirations and strike prices play a role. I don't know how the dealers balance their books.
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Re: Let's Talk SPX Box Spreads

Post by Kevin M »

DelMar wrote: Wed Aug 03, 2022 1:25 pm Hi Kevin, I'm a follower of your exploits across Nominals, TIPS, & Box Spreads and am extremely appreciative of how you share, in detail, your journey of doing, learning & sharing.

Like you, I'm considering the viability of utilizing SPX Box Spreads to eek out just a bit more yield than other "no-risk" alternatives. I'm curious how the feature of the zero state tax feature of treasuries plays into your analysis as compared to SPX Box Spreads.

Are you in a state that has minimal/zero state tax obligations that make this an apples to apples comparison. Or, do you live in a state where that is a consideration and, if so, how are you reconciling?

I'm in California. Currently I'm building positions in Treasuries that will represent a 10 year living expense bucket. On my current track I'll eventually have a ladder of 12 rungs of 1 year bills at 250K each. The amounts are sizable, I'm confident in my ability to execute error free trades and, like you, I have time to spend on learning, doing & sharing.

In the weeks/months ahead I'd like to determine if the Box Spread juice is worth the squeeze in my case. If so, then upon maturation of my nominals I'll begin dipping my toes in those waters.

Rob
Hi Rob. Welcome to the journey.

Yes, I consider taxation when comparing box spreads to Treasuries in my taxable account (I ignore it in my IRA). This is what all of my TEY spread comments refer to.

For Treasuries, I use the formula derived in this thread: Taxable Equivalent Yield (TEY).

For box spreads, I worked out the TEY formula in this post on page 2 of this thread: Box Spread taxable equivalent yield.

It turns out that at 9.3% state (CA) marginal tax rate and 22% fed marginal, the TEY of a Treasury is higher than that of a box spread for same yield. This is why my TEY spread over Treasury is always smaller than the net yield spread.

I think I've posted every purchase I've made, so you can see the gross yield, net yield, and TEY spreads for each purchase.

I don't know what you mean by 12 rungs of 1-year bills, and how this reconciles with a 10-year living expense bucket. Do you mean you have been buying a 52-week bill every month, so you end up with a 1-year ladder with 12 monthly rungs?

For 10 years of living expenses I'd definitely include some TIPS. My plan has been to go about 50/50 nominals and TIPS, mostly using box spreads for the nominal portion in the taxable and IRA accounts in which I can buy them. Currently I am heavier in nominals because I've been buying very short-term box spreads hoping for higher TIPS yields (but I did buy a bit more TIPS today).

Kevin
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Re: Let's Talk SPX Box Spreads

Post by comeinvest »

Kevin M wrote: Wed Aug 03, 2022 3:16 pm Yes, I consider taxation when comparing box spreads to Treasuries in my taxable account (I ignore it in my IRA). This is what all of my TEY spread comments refer to.

For Treasuries, I use the formula derived in this thread: Taxable Equivalent Yield (TEY).

For box spreads, I worked out the TEY formula in this post on page 2 of this thread: Box Spread taxable equivalent yield.

It turns out that at 9.3% state (CA) marginal tax rate and 22% fed marginal, the TEY of a Treasury is higher than that of a box spread for same yield. This is why my TEY spread over Treasury is always smaller than the net yield spread.
If you go through the trouble of comparing TEY of box spreads with treasuries in taxable, then you could just go with a CA muni tax-free ETF, and probably come out ahead of both.
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Re: Let's Talk SPX Box Spreads

Post by Kevin M »

comeinvest wrote: Wed Aug 03, 2022 7:33 pm
Kevin M wrote: Wed Aug 03, 2022 3:16 pm Yes, I consider taxation when comparing box spreads to Treasuries in my taxable account (I ignore it in my IRA). This is what all of my TEY spread comments refer to.

For Treasuries, I use the formula derived in this thread: Taxable Equivalent Yield (TEY).

For box spreads, I worked out the TEY formula in this post on page 2 of this thread: Box Spread taxable equivalent yield.

It turns out that at 9.3% state (CA) marginal tax rate and 22% fed marginal, the TEY of a Treasury is higher than that of a box spread for same yield. This is why my TEY spread over Treasury is always smaller than the net yield spread.
If you go through the trouble of comparing TEY of box spreads with treasuries in taxable, then you could just go with a CA muni tax-free ETF, and probably come out ahead of both.
Not so, especially on a risk adjusted basis. First, I am buying very short term box spreads, so it would have to be a very short term fund. Looking at Vanguard short-term muni (VWSUX), the SEC yield is 1.45%, which for me is TEY of 1.91%. That's not even close to the 2.65% TEY I got on today's box spread purchase. And the fund duration is 1.1 years, which is much longer than the average duration of my box spread holdings.

Vanguard doesn't have any short-term CA muni funds, but they do have a CA muni MM fund with SEC yield of 1.17%, which for me is TEY of 1.70%. By comparison, the national muni MM fund sec yield is 1.27%, which for me is a TEY of 1.68%, which I not to show that the TEY of a CA fund is not that much different for me than that of a national muni fund.

A better comparison would be to individual short-term muni bonds of the same maturity, but they are much more time consuming to evaluate (I built a ladder of individual munis a few years ago, but they all have matured).

Kevin
If I make a calculation error, #Cruncher probably will let me know.
comeinvest
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Re: Let's Talk SPX Box Spreads

Post by comeinvest »

Kevin M wrote: Wed Aug 03, 2022 7:49 pm
comeinvest wrote: Wed Aug 03, 2022 7:33 pm
Kevin M wrote: Wed Aug 03, 2022 3:16 pm Yes, I consider taxation when comparing box spreads to Treasuries in my taxable account (I ignore it in my IRA). This is what all of my TEY spread comments refer to.

For Treasuries, I use the formula derived in this thread: Taxable Equivalent Yield (TEY).

For box spreads, I worked out the TEY formula in this post on page 2 of this thread: Box Spread taxable equivalent yield.

It turns out that at 9.3% state (CA) marginal tax rate and 22% fed marginal, the TEY of a Treasury is higher than that of a box spread for same yield. This is why my TEY spread over Treasury is always smaller than the net yield spread.
If you go through the trouble of comparing TEY of box spreads with treasuries in taxable, then you could just go with a CA muni tax-free ETF, and probably come out ahead of both.
Not so, especially on a risk adjusted basis. First, I am buying very short term box spreads, so it would have to be a very short term fund. Looking at Vanguard short-term muni (VWSUX), the SEC yield is 1.45%, which for me is TEY of 1.91%. That's not even close to the 2.65% TEY I got on today's box spread purchase. And the fund duration is 1.1 years, which is much longer than the average duration of my box spread holdings.

Vanguard doesn't have any short-term CA muni funds, but they do have a CA muni MM fund with SEC yield of 1.17%, which for me is TEY of 1.70%. By comparison, the national muni MM fund sec yield is 1.27%, which for me is a TEY of 1.68%, which I not to show that the TEY of a CA fund is not that much different for me than that of a national muni fund.

A better comparison would be to individual short-term muni bonds of the same maturity, but they are much more time consuming to evaluate (I built a ladder of individual munis a few years ago, but they all have matured).

Kevin
What I really meant is a CA tax-exempt money market fund, not a muni bond fund. Only money-market is comparable to your short-term box spreads.
I think you have to look at the "yield to maturity" of the funds minus the expense ratio, not at the 30-day SEC yield. There was some discussion on this forum about the definition of "SEC yield", and there seems to be more than 1 definition, some of which are not mathematically very precise, and which may or may not be equivalent to each other. It is unclear to me for example if it is retrospective or expected, and if it accounts for constituents trading above or below par and the expected yield via capital gains from pulling to par. I personally have not got to the grounds of "SEC yield". What I do know is that portfolio yield to maturity is obviously a very good approximation of the expected return of the fund (minus expense ratio).
Portfolio yield to maturity of VWSUX for example is currently 1.9%, and the expense ratio is 0.09%.
The Vanguard CA money market fund (VCTXX) has a 7-day SEC yield of 1.17%, expense ratio of 0.16%, and an average time to maturity of 8 days. It doesn't publish a portfolio yield to maturity, and it is possible that due to the very short maturity, SEC yield and portfolio yield are identical in this case.
Is seems like most money market funds have a TEY of about the yield of 1-month treasury bill.
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Kevin M
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Re: Let's Talk SPX Box Spreads

Post by Kevin M »

^Agree that the 30-day SEC yield will lag the YTM minus ER. This won't be too much of an issue for the 7-day SEC yield of a money market fund, although it will have some impact when yields are changing quickly. I used the SEC yield of VCTXX to show how its TEY for me at 1.7% is much less than the 2.5-2.6% I got on last two box purchases.

For VWSUX (short-term muni), if I use 1.8% as the yield it results in TEY of 2.4%, which still is not competitive on a risk-adjusted basis (fund has longer duration).

Kevin
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adamhg
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Re: Let's Talk SPX Box Spreads

Post by adamhg »

Here's a new project to calculate live box spread rate spreads. Quote times are UTC and were live as of the screenshot.

Image

With the large interest rate movement today, I thought it was a good opportunity post this before the daily boxtrades.com dump tomorrow and keep me honest. Looked pretty consistent except for the first one and the last few starting around Dec'24. The short duration makes it harder to find a good mid-point and the last few appears to be when liquidity starts to dry up on the ask side.
comeinvest
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Re: Let's Talk SPX Box Spreads

Post by comeinvest »

adamhg wrote: Fri Aug 05, 2022 11:11 am Here's a new project to calculate live box spread rate spreads. Quote times are UTC and were live as of the screenshot.

Image

With the large interest rate movement today, I thought it was a good opportunity post this before the daily boxtrades.com dump tomorrow and keep me honest. Looked pretty consistent except for the first one and the last few starting around Dec'24. The short duration makes it harder to find a good mid-point and the last few appears to be when liquidity starts to dry up on the ask side.
I think what you are doing is fantastic, but can you please elaborate? Since your table has spreads with specific strike prices, these data are from the complex order book? Or synthetic quotes from the simple book? What are the bid and ask quantities? What is your methodology? Sounds like a fantastic project!
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Re: Let's Talk SPX Box Spreads

Post by adamhg »

comeinvest wrote: Fri Aug 05, 2022 6:38 pm I think what you are doing is fantastic, but can you please elaborate? Since your table has spreads with specific strike prices, these data are from the complex order book? Or synthetic quotes from the simple book? What are the bid and ask quantities? What is your methodology? Sounds like a fantastic project!
l
Taking the n highest oi (ie most liquid) strikes per put or call for each expiration and calculating the box yield based on the best bid or ask depending on if you’re going long or short. The idea bid and ask rates are the best rates you could get if you market ordered all four legs off the box. The mid rate is the midpoint between the bid and ask rates
LoveTheBogle
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Re: Let's Talk SPX Box Spreads

Post by LoveTheBogle »

Is it possible to close a SHORT box spread for a GAIN before expiration? In my Fidelity account the options summary page correctly paired the four positions of a short box trade where I got a credit and it is showing a + and in green for unrealized gain/loss. It isn't much, but it isn't zero and all of my other short box trades that are open right now are red and a negative number for the unrealized gain/loss. I'm thinking it is because of bad quotes even though the market is open because maybe the actual strike and expiration has little to no volume.

If it is possible to close a short box trade for a gain then can someone explain what took place for this to happen?
petulant
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Re: Let's Talk SPX Box Spreads

Post by petulant »

LoveTheBogle wrote: Mon Aug 08, 2022 2:10 pm Is it possible to close a SHORT box spread for a GAIN before expiration? In my Fidelity account the options summary page correctly paired the four positions of a short box trade where I got a credit and it is showing a + and in green for unrealized gain/loss. It isn't much, but it isn't zero and all of my other short box trades that are open right now are red and a negative number for the unrealized gain/loss. I'm thinking it is because of bad quotes even though the market is open because maybe the actual strike and expiration has little to no volume.

If it is possible to close a short box trade for a gain then can someone explain what took place for this to happen?
A short box spread can be thought to have three components: the future payoff amount, the (smaller) proceeds received upfront, and the discount or interest rate so that the proceeds grow to the payoff amount. Once the proceeds are received, the short box spread continues to have a current present value that is appreciating toward the payoff amount like a zero-coupon bond. If prevailing interest rates go up but the future payoff remains constant, then the present value of the payoff, aka the current market value, should decline so that pv*(1+r)=fv. In that event, you may be able to buy back the box spread at a gain compared to the original position. For context, the Fed has been raising short-term interest rates, and treasury.gov shows that one-month treasury bill rates have climbed from a low of 0.98% on June 22 to 2.23% today. I'm not sure I understand specifically your points about the interface at Fidelity or if this is what you're talking about, but maybe it is.
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Re: Let's Talk SPX Box Spreads

Post by indexfundfan »

LoveTheBogle wrote: Mon Aug 08, 2022 2:10 pm Is it possible to close a SHORT box spread for a GAIN before expiration? In my Fidelity account the options summary page correctly paired the four positions of a short box trade where I got a credit and it is showing a + and in green for unrealized gain/loss. It isn't much, but it isn't zero and all of my other short box trades that are open right now are red and a negative number for the unrealized gain/loss. I'm thinking it is because of bad quotes even though the market is open because maybe the actual strike and expiration has little to no volume.

If it is possible to close a short box trade for a gain then can someone explain what took place for this to happen?
You can close off a box spread by doing the opposite of opening the box spread. Instead of "buy to open", you use "sell to close"; and instead of "sell to open", you use "buy to close".
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