Box Spreads as Loans - Interactive Brokers IBKR - 2021 [and later]

[bling]

OK, this thread has focused on using Box Spreads to borrow money, but are there any concerns with lending via boxes using IBKR? I went long on a small, short duration box to test things out, and it seems like the rates are excellent for the ease and what I perceive as minimal risk.

I will probably focus on boxes expiring this year to avoid some of the tax concerns I have seen mentioned.

box spreads expiring june of 2024 are going for around 4.8% right now.

1 year CDs can be had for 5%.

something tells me that you should be able to earn more with box spread instead of CDs due to the added complexity but that doesn't seem to be the case....maybe it's because CDs have maximums and so it doesn't make sense for the big fish?

[adamhg]

OK, this thread has focused on using Box Spreads to borrow money, but are there any concerns with lending via boxes using IBKR? I went long on a small, short duration box to test things out, and it seems like the rates are excellent for the ease and what I perceive as minimal risk.

I will probably focus on boxes expiring this year to avoid some of the tax concerns I have seen mentioned.

I just rebuilt my long box spread ladder recently. I don't use Ibkr, but no concerns here.

box spreads expiring june of 2024 are going for around 4.8% right now.

1 year CDs can be had for 5%.

something tells me that you should be able to earn more with box spread instead of CDs due to the added complexity but that doesn't seem to be the case....maybe it's because CDs have maximums and so it doesn't make sense for the big fish?

Sounds like a good opportunity to short the box and invest in CDs for some free money

[comeinvest]

OK, this thread has focused on using Box Spreads to borrow money, but are there any concerns with lending via boxes using IBKR? I went long on a small, short duration box to test things out, and it seems like the rates are excellent for the ease and what I perceive as minimal risk.

I will probably focus on boxes expiring this year to avoid some of the tax concerns I have seen mentioned.

I just rebuilt my long box spread ladder recently. I don't use Ibkr, but no concerns here.

box spreads expiring june of 2024 are going for around 4.8% right now.

1 year CDs can be had for 5%.

something tells me that you should be able to earn more with box spread instead of CDs due to the added complexity but that doesn't seem to be the case....maybe it's because CDs have maximums and so it doesn't make sense for the big fish?

Sounds like a good opportunity to short the box and invest in CDs for some free money

I think FDIC insured CDs have traditionally been a bit of a freebie for retail customers with some slim arbitrage opportunity to treasuries, but with upper limits and paperwork and such, and the money is also locked and not tradable like treasuries or options. Not comparable.

[richardm]

Apologies if this has been discussed before. Generally speaking, does the group think it's safe to let a box expire? Or should we strive to close it prior to expiry?

I ask because I've carried boxes into a new year and witnessed legs being marked-to-market strangely, creating phantom gains/losses from a tax perspective. I'm guessing this wouldn't happen at expiry because there's no "wiggle room" in options with zero theta. But reckon I should ask as I've got a long-term box "maturing" in 23 days and I'd hate for a wonky mark to mess up the trade.

Also, is there any consensus on strategy when it comes to opening short-term boxes and rolling them versus going 1-2 years out? I figure this hinges on the individual investor's interest rate predictions (i.e. go long-term to "lock in" today's interest rate) but again I wonder if there's something I'm missing.

Thanks all!

[tj-longterm]

Apologies if this has been discussed before. Generally speaking, does the group think it's safe to let a box expire? Or should we strive to close it prior to expiry?

I ask because I've carried boxes into a new year and witnessed legs being marked-to-market strangely, creating phantom gains/losses from a tax perspective. I'm guessing this wouldn't happen at expiry because there's no "wiggle room" in options with zero theta. But reckon I should ask as I've got a long-term box "maturing" in 23 days and I'd hate for a wonky mark to mess up the trade.

Also, is there any consensus on strategy when it comes to opening short-term boxes and rolling them versus going 1-2 years out? I figure this hinges on the individual investor's interest rate predictions (i.e. go long-term to "lock in" today's interest rate) but again I wonder if there's something I'm missing.

Thanks all!

Marks don't have anything to do with the expiration. The value on expiration is a fixed amount. As friendly advice, I'd suggest re-reading how box spreads work and performing the calculation yourself to be sure you understand how they're working!

There should be little reason to close a box that's expiring soon early.

Regarding consensus on strategy, I'd say no, but you can pretty easily come up with a pro/con list. Pros/cons of short-term boxes:

Pros:
- functions more like a floating rate, not paying a premium for a long term rate
- smaller fluctuations in mark to market values at year end that might adversely affect you

Cons:
- functions more like a floating rate, hurt more by unexpected inflation
- added transaction costs, as well as time spent placing the trades

There may be additional pros/cons if you think you, of all the smart people watching the market, can better predict where rates are going.

[richardm]

Marks don't have anything to do with the expiration. The value on expiration is a fixed amount. As friendly advice, I'd suggest re-reading how box spreads work and performing the calculation yourself to be sure you understand how they're working!

I understand how boxes work, thanks. I'm less adept at explaining my thought process clearly.

I'll try again: I don't trust TD Ameritrade's mark-to-market when the market is closed. What I'm asking is whether or not I can trust them to value all four legs accurately at expiration.

If I can then I've no issue with just letting the box expire and letting them take the $30k I owe for this particular box.

If not then I'd prefer to submit a GTC buy-to-close order @ perhaps 5-10 DTE and start walking it up -- this way I'd know exactly what I'm paying to close the box rather than blindly trusting their assigned valuations at expiry.

[sharkly]

Marks don't have anything to do with the expiration. The value on expiration is a fixed amount. As friendly advice, I'd suggest re-reading how box spreads work and performing the calculation yourself to be sure you understand how they're working!

I understand how boxes work, thanks. I'm less adept at explaining my thought process clearly.

I'll try again: I don't trust TD Ameritrade's mark-to-market when the market is closed. What I'm asking is whether or not I can trust them to value all four legs accurately at expiration.

If I can then I've no issue with just letting the box expire and letting them take the $30k I owe for this particular box.

If not then I'd prefer to submit a GTC buy-to-close order @ perhaps 5-10 DTE and start walking it up -- this way I'd know exactly what I'm paying to close the box rather than blindly trusting their assigned valuations at expiry.

I think tj-longterm answered your question. Bolded for emphasis.

[comeinvest]

Marks don't have anything to do with the expiration. The value on expiration is a fixed amount. As friendly advice, I'd suggest re-reading how box spreads work and performing the calculation yourself to be sure you understand how they're working!

I understand how boxes work, thanks. I'm less adept at explaining my thought process clearly.

I'll try again: I don't trust TD Ameritrade's mark-to-market when the market is closed. What I'm asking is whether or not I can trust them to value all four legs accurately at expiration.

If I can then I've no issue with just letting the box expire and letting them take the $30k I owe for this particular box.

If not then I'd prefer to submit a GTC buy-to-close order @ perhaps 5-10 DTE and start walking it up -- this way I'd know exactly what I'm paying to close the box rather than blindly trusting their assigned valuations at expiry.

I have some serious doubt if you understand the mechanism of options and their settlement. There is no leeway or wiggle room for an option's valuation at expiration.

[tj-longterm]

Marks don't have anything to do with the expiration. The value on expiration is a fixed amount. As friendly advice, I'd suggest re-reading how box spreads work and performing the calculation yourself to be sure you understand how they're working!

I understand how boxes work, thanks. I'm less adept at explaining my thought process clearly.

I'll try again: I don't trust TD Ameritrade's mark-to-market when the market is closed. What I'm asking is whether or not I can trust them to value all four legs accurately at expiration.

If I can then I've no issue with just letting the box expire and letting them take the $30k I owe for this particular box.

If not then I'd prefer to submit a GTC buy-to-close order @ perhaps 5-10 DTE and start walking it up -- this way I'd know exactly what I'm paying to close the box rather than blindly trusting their assigned valuations at expiry.

Hi Richard, I didn't mean to get everyone to pile onto you. There are two reasons it doesn't matter here. One, which is relevant to options in general is that even though SPX options are cash settled, they're calculated based on the calculated value of SPX, not the most recent trade prices of the options. Options are always settled based on the underlying security/index/etc, not based on how the options have been trading.

The other, which is relevant to box spreads is that the value (of SPX) used at settlement doesn't matter because of how the strategy is executed. It doesn't matter if there is a flash crash in the market, or anything. The width of the spread is the only thing that will matter because the same SPX value will be used for settling all of the legs.

[comeinvest]

Marks don't have anything to do with the expiration. The value on expiration is a fixed amount. As friendly advice, I'd suggest re-reading how box spreads work and performing the calculation yourself to be sure you understand how they're working!

I understand how boxes work, thanks. I'm less adept at explaining my thought process clearly.

I'll try again: I don't trust TD Ameritrade's mark-to-market when the market is closed. What I'm asking is whether or not I can trust them to value all four legs accurately at expiration.

If I can then I've no issue with just letting the box expire and letting them take the $30k I owe for this particular box.

If not then I'd prefer to submit a GTC buy-to-close order @ perhaps 5-10 DTE and start walking it up -- this way I'd know exactly what I'm paying to close the box rather than blindly trusting their assigned valuations at expiry.

Hi Richard, I didn't mean to get everyone to pile onto you. There are two reasons it doesn't matter here. One, which is relevant to options in general is that even though SPX options are cash settled, they're calculated based on the calculated value of SPX, not the most recent trade prices of the options. Options are always settled based on the underlying security/index/etc, not based on how the options have been trading.

The other, which is relevant to box spreads is that the value (of SPX) used at settlement doesn't matter because of how the strategy is executed. It doesn't matter if there is a flash crash in the market, or anything. The width of the spread is the only thing that will matter because the same SPX value will be used for settling all of the legs.

That is for final settlement at expiration; I think the daily mark-to-market settlement is based on the options market. Please correct me if I'm wrong. (I think otherwise they would have to come up with a theoretical value for the time value, the value of the optionality, which would be highly subjective. The options market rather defines the time value, as far as I know.)

[tj-longterm]

Hi Richard, I didn't mean to get everyone to pile onto you. There are two reasons it doesn't matter here. One, which is relevant to options in general is that even though SPX options are cash settled, they're calculated based on the calculated value of SPX, not the most recent trade prices of the options. Options are always settled based on the underlying security/index/etc, not based on how the options have been trading.

The other, which is relevant to box spreads is that the value (of SPX) used at settlement doesn't matter because of how the strategy is executed. It doesn't matter if there is a flash crash in the market, or anything. The width of the spread is the only thing that will matter because the same SPX value will be used for settling all of the legs.

That is for final settlement at expiration; I think the daily mark-to-market settlement is based on the options market. Please correct me if I'm wrong. (I think otherwise they would have to come up with a theoretical value for the time value, the value of the optionality, which would be highly subjective. The options market rather defines the time value, as far as I know.)

Yes, I'm only talking about expiration here. OP was worried that a "bad mark" (a weird recent trade) at expiration time would cause them problems, which shouldn't be relevant at expiration for any options, but also the value of SPX won't matter at expiration anyways, assuming you've setup your box spread trade correctly.

[richardm]

I have some serious doubt if you understand the mechanism of options and their settlement. There is no leeway or wiggle room for an option's valuation at expiration.

...which is why I should be OK to let the box expire. I said as much in my original post:

I'm guessing this wouldn't happen at expiry because there's no "wiggle room" in options with zero theta

...but I'd rather ask here than stick my finger in a light socket because the breaker should have been switched off.

I'll let this $30k box expire and see exactly how much cash is withdrawn. Thanks for everyone's help.

[tj-longterm]

I have some serious doubt if you understand the mechanism of options and their settlement. There is no leeway or wiggle room for an option's valuation at expiration.

...which is why I should be OK to let the box expire. I said as much in my original post:

I'm guessing this wouldn't happen at expiry because there's no "wiggle room" in options with zero theta

...but I'd rather ask here than stick my finger in a light socket because the breaker should have been switched off.

I'll let this $30k box expire and see exactly how much cash is withdrawn. Thanks for everyone's help.

You are going to have $30K withdrawn down to the last cent.
The price is predetermined in the contracts you bought and sold. There’s no wiggle room because it’s the price set in your options contracts.

[skierincolorado]

Asked in another thread but why are June boxes at 6%? They don't have the same default risk as treasuries and ffr is only 5%

[ggtt]

Asked in another thread but why are June boxes at 6%? They don't have the same default risk as treasuries and ffr is only 5%

I don't know how the OCC's internal plumbing works but possible that treasuries are used a collateral to back options positions so if default risk is priced in then counterparty risk for boxes should be too.

[comeinvest]

Asked in another thread but why are June boxes at 6%? They don't have the same default risk as treasuries and ffr is only 5%

I don't know how the OCC's internal plumbing works but possible that treasuries are used a collateral to back options positions so if default risk is priced in then counterparty risk for boxes should be too.

I'm not in a position to confirm or refute this, but I think CBOE options are part of the securities account margining, in accounts which can have all sorts of securities and not necessarily treasuries. The margin requirements are usually set by the exchanges and the brokers based on current and expected volatility. My broker (IB) recently increased margin on treasuries and treasury futures because of the uncertainty and potential volatility because of the debt ceiling. This should not result in higher or lower valuation of SPX box spreads, in my understanding, as the settlement of options should not be affected by the debt ceiling, and the risk is already reflected in the margin requirement. For example, equity index futures are not priced particularly high just because equity indexes have higher volatility than other markets; they are typically priced based on cash and carry arbitrage. But what do I know.
You could argue that dealers use treasuries to hedge the duration risk of their balance sheet positions including options box spreads; but then again, treasuries don't seem like an accurate or particularly good hedge at this time, because the hedge would have higher risk than the options. So why wouldn't they use SOFR futures or fed fund futures for hedging instead. It's hard to argue against fed fund futures being a good hedge of fed funds and short-term interest rates, as long as fed funds are not affected by the debt ceiling; isn't it?

Related discussion: viewtopic.php?p=7284176#p7284176

[adamhg]

I just added something fun to boxtrades.com. It show now show the implied best bid/ask as well as the live mid point rate for each SPX tenor. Should be helpful for a more current view of what box spreads should trade for.

[Chuck]

[...] This should not result in higher or lower valuation of SPX box spreads, in my understanding, as the settlement of options should not be affected by the debt ceiling, and the risk is already reflected in the margin requirement.

As long as investors view box spreads and treasurys as comparable investments, their pricing will tend to be similar, according to the law of supply and demand.

[comeinvest]

I just added something fun to boxtrades.com. It show now show the implied best bid/ask as well as the live mid point rate for each SPX tenor. Should be helpful for a more current view of what box spreads should trade for.

Sound fascinating, thanks. I remember we had a conversation about the methodology a while ago, and there were some open questions. Obviously the indicative synthetic "bid" and "ask" are not very meaningful by themselves because the orderbook is effectively hidden. (Dealers bid for customer orders.) If you can please remind us about the predictive capability of this information, i.e. your findings how "realized" box spread yields correlate with the indicative midpoint.
Also, if the "midpoint yield curve" is robust and consistent if you look at the chart per maturity.
And lastly, is the size of the indicative bid/ask spread indicative of the distance of the actual realized trades from the midpoint.
Thanks again!