richardm wrote: ↑Tue May 23, 2023 9:35 am
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.
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:
- 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
- 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.