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

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

Post by mutedbytes »

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

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

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

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

Post by mutedbytes »

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

I can see where, on these long dated options, they are not as liquid as you might like. Maybe once in a while somebody just executes one because it's not selling for the price it should.
I would think this should only ever be considered with European style options, such as those on ^SPX or ^XSP. Specifically to eliminate assignment risk.
gougou
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by gougou »

I recently got the box spread of 2300, 5600 Jan 19, 2023 filled at around 3270, so about 0.92% interest rate over ~1.5 years. Looks like a good deal to me. Hopefully it never gets auto-liquidated :D
The sillier the market’s behavior, the greater the opportunity for the business like investor.
comeinvest
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by comeinvest »

gougou wrote: Thu Jun 24, 2021 4:40 pm I recently got the box spread of 2300, 5600 Jan 19, 2023 filled at around 3270, so about 0.92% interest rate over ~1.5 years. Looks like a good deal to me. Hopefully it never gets auto-liquidated :D
How did you calculate the 0.92% ? I calculate about 0.58% interest rate for your box spread.
gougou
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by gougou »

comeinvest wrote: Sun Jun 27, 2021 7:06 pm
gougou wrote: Thu Jun 24, 2021 4:40 pm I recently got the box spread of 2300, 5600 Jan 19, 2023 filled at around 3270, so about 0.92% interest rate over ~1.5 years. Looks like a good deal to me. Hopefully it never gets auto-liquidated :D
How did you calculate the 0.92% ? I calculate about 0.58% interest rate for your box spread.
Yeah so it's 0.92% interest over a little over 1.5 years which comes to about 0.6% APR.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
moneytree
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by moneytree »

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

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


Example:

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

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

:?: :?
Enlighten me?

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

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

Code: Select all

16:15:47 SPX Dec14'23 3000 - 4000 Box SLD 1 980.00 CBOE X 6.03
16:15:18 SPX Dec14'23 4000 - 3000 Box BOT 1 -980.00 CBOE X 6.03
Last edited by moneytree on Thu Jul 01, 2021 2:01 pm, edited 2 times in total.
mutedbytes
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by mutedbytes »

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

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


Example:

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

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

:?: :?
Enlighten me?

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

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

Code: Select all

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

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

What does it mean to long the "reverse" spread? How do the individual components differ?
comeinvest
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by comeinvest »

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

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


Example:

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

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

:?: :?
Enlighten me?

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

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

Code: Select all

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

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

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

I'm curious how the complex limit order book can be viewed. I still didn't figure out that one. The spread on boxes seems to be huge. (By spread I mean the spread between the prices at which buy and sell orders actually get filled, not the quoted prices.) I think it's not currently possible to *buy* a spread at positive interest rates. Did anyone try? Theoretically I should be able to look for resting box limit orders of market participants other than market makers, to eliminate the spread.
moneytree
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by moneytree »

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

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

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

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

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


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

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

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

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

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

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

When you refer to buying a box spread with positive interest rates, are you referring to becoming the lender?
Ex. Buy 1000-2000 box at 1100? Not sure why a retail investor would want to do this. You can probably find better with a FDIC-insured savings.
Last edited by moneytree on Fri Jul 02, 2021 10:54 am, edited 1 time in total.
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firebirdparts
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by firebirdparts »

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

Anyway, even if somebody explains it, I don't really have any idea how that looks to the market makers.
This time is the same
comeinvest
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by comeinvest »

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

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

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

Regarding your second question. Yes, becoming a lender. It would be attractive if the bid/ask spreads for boxes were tighter, or we could view the complex order book and eliminate the market maker. For example, you want to sell a box for leverage. I have some leftover cash that I need to park for some time. I see your limit order, and we can transact close to the mid price.
Chuck
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by Chuck »

comeinvest wrote: Fri Jul 02, 2021 3:19 pm For example, you want to sell a box for leverage. I have some leftover cash that I need to park for some time. I see your limit order, and we can transact close to the mid price.
In that case, just start a thread and see if someone takes the other side of the trade. :)
comeinvest
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by comeinvest »

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

Post by levinvest1 »

I am trying to run a Box Spread at IBKR. I am thinking about borrowing 300-500K to lower my margin interest payment. I would really appreciate some handholding here. I figured I can't use the web interface for this. I downloaded the Trader Workstation, but I can't figure out where to enter the box spread. Is there any link which explains this? Or maybe someone can help me here?
Chuck
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by Chuck »

FYI this works at any broker, not just IBKR. As long as you have level something option trading. I've been playing the low interest box game at etrade for years. I've never even bothered with the relatively not great margin rates.
nalor511
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by nalor511 »

Chuck wrote: Fri Jul 16, 2021 10:42 pm FYI this works at any broker, not just IBKR. As long as you have level something option trading. I've been playing the low interest box game at etrade for years. I've never even bothered with the relatively not great margin rates.
Anyone interested in writing a quick tutorial for Fidelity?
mutedbytes
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by mutedbytes »

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

Post by nalor511 »

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

Post by travlinman561 »

Is it possible to buy (go long) SPX box spreads in a portfolio margin account in order to earn a higher interest rate on cash margin that is being used to secure naked puts, than can be earned on short term treasuries or short term high grade corporate debt?
comeinvest
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by comeinvest »

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

EDIT: I got ca. 0.45% for buying an SPX box. Ca. 0.1% less than the interest I pay for selling the box.
Last edited by comeinvest on Sun Oct 17, 2021 10:07 pm, edited 1 time in total.
Chuck
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by Chuck »

travlinman561 wrote: Sat Jul 24, 2021 5:39 am Is it possible to buy (go long) SPX box spreads in a portfolio margin account in order to earn a higher interest rate on cash margin that is being used to secure naked puts, than can be earned on short term treasuries or short term high grade corporate debt?
Not likely. Since you are not a market maker, you are on the wrong side of the bid-ask spread.
Z33
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by Z33 »

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

Post by DMoogle »

Reading through this thread - so are the Euro Stoxx spreads viable options to someone in the US to get a negative interest rate loan? Or is it not feasible, or opens up additional currency risk somehow?
comeinvest
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by comeinvest »

DMoogle wrote: Wed Sep 08, 2021 9:11 am Reading through this thread - so are the Euro Stoxx spreads viable options to someone in the US to get a negative interest rate loan? Or is it not feasible, or opens up additional currency risk somehow?
As a U.S. person, you are not allowed to trade Euro Stoxx options, courtesy of your U.S government, based on some archaic law from early last century. Also, there are U.S. government agencies who actually feel entitled (and get paid with taxpayers' money) to enforce this law. They go at great length to meticulously interpret this law, and approve or disapprove every single futures and options product in the world whether it's "safe" for U.S. persons. You won't be able to trade Euro Stoxx options with any broker.

Now don't ask me why U.S. persons can trade SPX options, but no Euro Stoxx options. Or why U.S. persons can trade Bitcoins or put 100% of their life savings in some meme stock, but are not allowed to hedge their investment strategy with Euro Stoxx options.

There is also no exception to this law based on assets or investor sophistication. There is some exception, I forgot the details, but the hurdle was so high that I was not able to provide the required documents.
BeerTooth
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by BeerTooth »

could this strategy be used in retirement, to borrow against your assets to fund living expenses, without selling the assets?

If you can get a cheap loan that gives you access to 4% SWR every year, you could expect the assets to appreciate more than 4% in most good years, and in down years you'd only need to sell enough to maintain margin requirements.
DMoogle
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by DMoogle »

BeerTooth wrote: Thu Sep 09, 2021 9:27 am could this strategy be used in retirement, to borrow against your assets to fund living expenses, without selling the assets?

If you can get a cheap loan that gives you access to 4% SWR every year, you could expect the assets to appreciate more than 4% in most good years, and in down years you'd only need to sell enough to maintain margin requirements.
Could it? Yes, in a taxable portfolio margin account (i.e. not an IRA), if I'm understanding right from the discussion in this thread.

Should it? Probably not. Leveraged strategies are risky as-is. Typically if you're in retirement, you're not really going to want to pursue a leveraged strategy, at least not leveraged equities. I can see a case for maybe adding on some treasuries, but you'd be better off (from an interest rate POV) by doing that via futures rather than box spreads. Or just use NTSX.
skierincolorado
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by skierincolorado »

BeerTooth wrote: Thu Sep 09, 2021 9:27 am could this strategy be used in retirement, to borrow against your assets to fund living expenses, without selling the assets?

If you can get a cheap loan that gives you access to 4% SWR every year, you could expect the assets to appreciate more than 4% in most good years, and in down years you'd only need to sell enough to maintain margin requirements.
Yes but it’s a bad idea for most. Most retirees are and should be risk averse and holding a high percent of bonds. Maybe it could make sense for early retirees. It could also be used just a little bit to reduce sequence of return risk.

Although most retirees are like 60:40 or 50:50 stock bond, I think taking some bond leverage is actually pretty reasonable in retirement. So like 60:120 or 50:100 stock: bond. Of course, there are cheaper and easier ways of acquiring bond leverage than a box spread: treasury futures. Do a retiree with 1m could hold 500k of stock, 400k of bnd and 600k of treasury futures.
Chuck
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by Chuck »

You only know your borrowing cost for the longest term options available (less than 3 years). This is not a safe strategy for long-term borrowing.
BeerTooth
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by BeerTooth »

Chuck wrote: Thu Sep 09, 2021 10:07 am You only know your borrowing cost for the longest term options available (less than 3 years). This is not a safe strategy for long-term borrowing.
sure but you only need to borrow ~1 year of living expenses at a time. If the forward-looking 3 year borrowing cost begins to look unfavorable, you just revert to a traditional asset-sale strategy
skierincolorado
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by skierincolorado »

Chuck wrote: Thu Sep 09, 2021 10:07 am You only know your borrowing cost for the longest term options available (less than 3 years). This is not a safe strategy for long-term borrowing.
The borrowing rate is always very near the risk-free-rate or LIBOR. Even if that rate is higher 3 years from now, if you were willing to borrowing at LIBOR today, you should be willing to borrow at LIBOR 3 years from now, whatever LIBOR is. If LIBOR has gone up, so has the expected return of all other assets because the pricing model for all capital assets uses LIBOR as the discount factor. So if borrowing at 0% to make 2% expected return (+/- risk) makes sense today, then borrowing at 3% to make 5% (+/- risk) will make sense 3 years from now.
skierincolorado
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by skierincolorado »

DMoogle wrote: Thu Sep 09, 2021 9:41 am
BeerTooth wrote: Thu Sep 09, 2021 9:27 am could this strategy be used in retirement, to borrow against your assets to fund living expenses, without selling the assets?

If you can get a cheap loan that gives you access to 4% SWR every year, you could expect the assets to appreciate more than 4% in most good years, and in down years you'd only need to sell enough to maintain margin requirements.
Could it? Yes, in a taxable portfolio margin account (i.e. not an IRA), if I'm understanding right from the discussion in this thread.

Should it? Probably not. Leveraged strategies are risky as-is. Typically if you're in retirement, you're not really going to want to pursue a leveraged strategy, at least not leveraged equities. I can see a case for maybe adding on some treasuries, but you'd be better off (from an interest rate POV) by doing that via futures rather than box spreads. Or just use NTSX.
You beat me to it. We had literally the same response and hit on the exact same 3-4 points
DMoogle
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by DMoogle »

skierincolorado wrote: Thu Sep 09, 2021 10:51 amYou beat me to it. We had literally the same response and hit on the exact same 3-4 points
I noticed that. Probably wouldn't have been able to touch on all those points without reading your posts in other threads, so kudos to you for that. :sharebeer
comeinvest
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by comeinvest »

skierincolorado wrote: Thu Sep 09, 2021 10:49 am
Chuck wrote: Thu Sep 09, 2021 10:07 am You only know your borrowing cost for the longest term options available (less than 3 years). This is not a safe strategy for long-term borrowing.
The borrowing rate is always very near the risk-free-rate or LIBOR. Even if that rate is higher 3 years from now, if you were willing to borrowing at LIBOR today, you should be willing to borrow at LIBOR 3 years from now, whatever LIBOR is. If LIBOR has gone up, so has the expected return of all other assets because the pricing model for all capital assets uses LIBOR as the discount factor. So if borrowing at 0% to make 2% expected return (+/- risk) makes sense today, then borrowing at 3% to make 5% (+/- risk) will make sense 3 years from now.
I thought the same for a while, but is it really true? Is the pricing model for capital assets the current spot LIBOR, the average expected future LIBOR, and/or the current long-term rates? Which of those is the expected equity risk premium based on, if we assume that the expected ERP is constant which you seem to imply?

Also, not for equities but for treasuries you can calculate the term premium from current long-term rates and interest rate futures (including the current LIBOR spot rate). It certainly would make more sense to borrow at short-term rates and invest in long-term treasuries, or by implication in equities, when the term premium is higher, or at least positive, wouldn't it? What I'm saying is, for the decision when to borrow or not you might not want to or have to blindly rely on a fixed premium on top of LIBOR.
DMoogle
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by DMoogle »

Could someone verify I'm setting this up right for one box? I chose Jan 2023 because it looks like there's more volume than Jun/Dec, so more likely I won't have trouble getting it filled. By my calculations, at $199.10 this should be essentially a 0.344% annual rate through Jan 2023. I suspect that might be a little low to get filled, so I'll probably leave it for a day or two then increase a little until it gets filled. Just want to make sure I'm setting up the buy/sell calls/puts right.

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

Post by skierincolorado »

DMoogle wrote: Mon Sep 13, 2021 10:30 am Could someone verify I'm setting this up right for one box? I chose Jan 2023 because it looks like there's more volume than Jun/Dec, so more likely I won't have trouble getting it filled. By my calculations, at $199.10 this should be essentially a 0.344% annual rate through Jan 2023. I suspect that might be a little low to get filled, so I'll probably leave it for a day or two then increase a little until it gets filled. Just want to make sure I'm setting up the buy/sell calls/puts right.

Image
Looks correct to me. What broker is this? The interface looks nice. I usually get much higher fill like .7% but I haven’t spent a lot of time searching the best contracts or waiting for fill. I just keep bumping until it fills.
DMoogle
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by DMoogle »

skierincolorado wrote: Mon Sep 13, 2021 10:34 amLooks correct to me. What broker is this? The interface looks nice. I usually get much higher fill like .7% but I haven’t spent a lot of time searching the best contracts or waiting for fill. I just keep bumping until it fills.
Thanks skier. This is Interactive Brokers' mobile app. I like it.

I figure boxes that expire sooner should be able to get lower rates theoretically, but not sure in practice.
skierincolorado
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by skierincolorado »

DMoogle wrote: Mon Sep 13, 2021 10:38 am
skierincolorado wrote: Mon Sep 13, 2021 10:34 amLooks correct to me. What broker is this? The interface looks nice. I usually get much higher fill like .7% but I haven’t spent a lot of time searching the best contracts or waiting for fill. I just keep bumping until it fills.
Thanks skier. This is Interactive Brokers' mobile app. I like it.

I figure boxes that expire sooner should be able to get lower rates theoretically, but not sure in practice.
I’ll have to try their mobile. I don’t really like using their tws.
DMoogle
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by DMoogle »

skierincolorado wrote: Mon Sep 13, 2021 10:47 am I’ll have to try their mobile. I don’t really like using their tws.
Agreed, it's clunky and non-intuitive. Their mobile platform is very smooth and simple by comparison. You can log into read-only mode automatically too, which is nice because pulling out that security card is a pain.
gougou
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by gougou »

travlinman561 wrote: Sat Jul 24, 2021 5:39 am Is it possible to buy (go long) SPX box spreads in a portfolio margin account in order to earn a higher interest rate on cash margin that is being used to secure naked puts, than can be earned on short term treasuries or short term high grade corporate debt?
Yes, you'll earn approximately the LIBOR rate minors some transactions costs and bid-ask spread. I think you can get around 0.5% APR to 0.6% APR for Jan 2023 expiry. I believe the profit you make from buying a Box Spread that's longer than 1 year is considered long term capital gains so the tax treatment could be better than interests income.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
Investing Lawyer
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by Investing Lawyer »

I finally decided to experiment with this out over my lunch break. I bought (sold?) one 4500/4400 box Jan 22 box to get 10k. I worked my order starting at $100 credit and walked it down successively by a tenth. It was executed at 99.7 credit for a .9% annual interest rate [(1.003^(12/4)-1)*100)]. I guess the lesson is to go longer than a quarter in length to get the better rate or go wider for more granularity in the offers.
Chuck
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by Chuck »

For 10 bucks I borrowed $10,000 for two months while I was waiting for my tax refund. I guess that's around 60 basis points. Actually the commission was $1.30, so a bit more.
DMoogle
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by DMoogle »

Sold (or bought? IB says I'm long) my first two boxes yesterday. For others' reference: December 2023 4600-4400. First one I priced at $196.80, it executed nearly immediately. Second one I priced at $196.90, it executed after several minutes. I left a $197.00 order open for the day, but it never filled.

If you include the $6 commission on each, that's effectively 0.74% rate for the first, and 0.71% rate for the second. Going to leave my $197 order open for a few more hours, then change to $196.95, and if that doesn't fill, settle on $196.90. Still have about 9 boxes to go.
skierincolorado
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by skierincolorado »

DMoogle wrote: Fri Sep 17, 2021 8:31 am Sold (or bought? IB says I'm long) my first two boxes yesterday. For others' reference: December 2023 4600-4400. First one I priced at $196.80, it executed nearly immediately. Second one I priced at $196.90, it executed after several minutes. I left a $197.00 order open for the day, but it never filled.

If you include the $6 commission on each, that's effectively 0.74% rate for the first, and 0.71% rate for the second. Going to leave my $197 order open for a few more hours, then change to $196.95, and if that doesn't fill, settle on $196.90. Still have about 9 boxes to go.
I think you'll get lower rates the larger the box. If you've got more to go try combining them. The bid-ask spread eats into a smaller box more than it does a larger box.
DMoogle
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by DMoogle »

skierincolorado wrote: Fri Sep 17, 2021 9:22 amI think you'll get lower rates the larger the box. If you've got more to go try combining them. The bid-ask spread eats into a smaller box more than it does a larger box.
OK, will give it a shot. Quick Google search suggests a 2000-1000 box seems to be popular. Just priced one at $988.50 (0.52% rate). Will increase it every couple of hours and report back once it fills.
skierincolorado
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by skierincolorado »

DMoogle wrote: Fri Sep 17, 2021 10:35 am
skierincolorado wrote: Fri Sep 17, 2021 9:22 amI think you'll get lower rates the larger the box. If you've got more to go try combining them. The bid-ask spread eats into a smaller box more than it does a larger box.
OK, will give it a shot. Quick Google search suggests a 2000-1000 box seems to be popular. Just priced one at $988.50 (0.52% rate). Will increase it every couple of hours and report back once it fills.
Are you sure that’s not from several years ago when the s&p was near those price levels? I think the strikes near the current price should have the most liquidity. So 5000-4000 or 4500-3500
DMoogle
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by DMoogle »

skierincolorado wrote: Fri Sep 17, 2021 10:39 am Are you sure that’s not from several years ago when the s&p was near those price levels? I think the strikes near the current price should have the most liquidity. So 5000-4000 or 4500-3500
Could be. Liquidity appears fairly low across the board for December 2023. To be honest, I kind of doubt it matters... it's likely not people that are executing these orders, but rather banking algos. And to that end, I wouldn't be surprised if spread and strike price even matters; those algos probably just look at the interest rate across all boxes.
DMoogle
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by DMoogle »

OK, last updates for others people's awareness. Filled last two (larger) boxes today:
Filled 5000-4000 Dec' 23 box @ $984.50. 0.705% after $6 commission.
Filled 5000-4000 Dec' 23 box @ $984.80. 0.691% after $6 commission.

So right around 0.7% seems to be the sweet spot at the moment. By the time I have to do this again, I assume that'll probably change. I'm not convinced that the selected strike prices matter in regards to liquidity (i.e. 5000-4000 would probably get the same rate and fill just as easily as 2000-1000). I did get a slightly better rate with the wider spread, but that could've just been because of daily fluctuations. I started with high prices, then gradually decreased them every few minutes/hours. The above prices filled in less than a half hour each.

So now I have two 4600-4400 boxes, and two 5000-4000 boxes. No more 1.6% IBKR margin payments!
Last edited by DMoogle on Mon Sep 20, 2021 2:55 pm, edited 2 times in total.
adamhg
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by adamhg »

@DMoogle thanks for sharing those numbers. I got curious what others were getting for their boxes and ran a quick query against all index options and caught/confirmed 3/4 of your box spreads. You'll be happy to know that you did quite well!

Though, I'm quite surprised that this trade isn't more popular. In the last week, I could only find 9 boxes using the most conservative method to match spreads (exact timestamp match on the minute bar).

Code: Select all

Date                 Rate    Credit  Amount Vol LowK  HighK Und Expiry     Dte   
9/20/2021 3:24:00 PM 0.6943% -98450  100000 1   4000  5000  SPX 12/15/2023 815.36
9/17/2021 8:09:39 PM 0.4940% -409500 410000 126 2000  6100  SPX 12/17/2021 90.16 
9/17/2021 7:59:00 PM 0.7008% -98430  100000 1   3000  4000  SPX 12/15/2023 818.17
9/17/2021 7:57:00 PM 0.7008% -98430  100000 1   3000  4000  SPX 12/15/2023 818.17
9/17/2021 7:48:00 PM 0.7365% -98350  100000 1   3000  4000  SPX 12/15/2023 818.18
9/17/2021 6:33:00 PM 0.7142% -19680  20000  1   4400  4600  SPX 12/15/2023 818.23
9/17/2021 4:21:14 PM 0.5015% -99751  100000 1   15500 16500 NDX 3/18/2022  181.32
9/16/2021 2:24:00 PM 0.6909% -19690  20000  1   4400  4600  SPX 12/15/2023 819.40
9/13/2021 7:55:51 PM 0.6058% -9924   10000  2   400   500   XSP 12/16/2022 458.17
8/20/2021 8:10:43 PM 0.5122% -499515 500000 1   800   5800  SPX 10/29/2021 69.16 
Rate above is the annualized rate ex fees using the fractional DTE from the trade timestamp. I can "find" more boxes if I relax the criteria (i.e. +/- 3-5 sec from the trade print adds several more, but makes it hard to match high/low strikes for the box).

ETA: fixed table
Last edited by adamhg on Mon Sep 20, 2021 4:15 pm, edited 1 time in total.
DMoogle
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by DMoogle »

Fascinating stuff, thanks for posting adamhg. Glad to hear I got some pretty low rates. And yowza, some of those others are crazy high. I wonder who's putting in those orders? I'm curious how quickly they filled; if it wasn't instant, then there's a definite arbitrage opportunity there. Kinda doubt it though.

I'm not super surprised these aren't more popular. I figure institutional traders probably have access to even lower rates, most retail investors don't touch margin, and it takes a decent amount of know-how to execute these. 2 months ago, I wouldn't have been able to explain what a box spread was. Plus, even if a retail investor is interested in this, it's not something that has to be done very frequently. Decent chance I won't execute more until these expire.

I'm not quite following how those rates calculated though. For the most recent one, it's 815 days to expiration, so I'm getting =(1/815)*(100000/98450 - 1)*365 = 0.70%, not 0.44%. What am I missing?
Last edited by DMoogle on Mon Sep 20, 2021 7:23 pm, edited 1 time in total.
JSandler
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by JSandler »

adamhg wrote: Mon Sep 20, 2021 2:43 pm I got curious what others were getting for their boxes and ran a quick query against all index options and caught/confirmed 3/4 of your box spreads. You'll be happy to know that you did quite well!
@adamhg: How are you able to query the index options? Just curious.
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