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

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comeinvest
Posts: 2709
Joined: Mon Mar 12, 2012 6:57 pm

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

Post by comeinvest »

klaus14 wrote: Tue Feb 08, 2022 12:03 am See:
Fxmove88 wrote: Sat Dec 11, 2021 12:28 am One has to be patient in getting a box filled. Just do a GTC limit order for selling the box. If you insist on getting filled immediately then you will be paying high interest.

The following study shows that Box interest rate has been about 0.38% above corresponding US treasury yield for various tenor. And during the crisis of 2008, the spread goes up triple.

https://www.stern.nyu.edu/sites/default ... a_19_1.pdf

Image

Image

Dec 2022 Box rate should be around 0.65%, given that the 1 year US treasury yield is at 0.27%
https://ycharts.com/indicators/1_year_treasury_rate

Correspondingly, Dec 2023 Box rate should be around 1.05% with the current 2 year US treasury yield at 0.67%
https://ycharts.com/indicators/2_year_treasury_rate
Thanks for re-posting. It would be interesting to relate this finding to the financing spread of futures during the same time when the box spread rates above T-Bills increased.
A ca. 0.5% increase in the spread above T-Bills as per the chart would result in a temporary drawdown of ca. 2.5% of the box size of a 5-year box. However, the drop in the risk-free rate would probably be bigger than 0.5%. With an investment in treasuries or treasury futures the 2.5% detraction could be avoided. However, treasury futures exhibited their own anomalies vs. cash treasuries during the Covid crisis, if I remember right. Futures also need to be rolled, which would result in unrecoverable actual cost if the roll date is during a time of high financing spreads.
sometalk
Posts: 36
Joined: Thu Jul 20, 2017 9:38 am
Location: Greater Boston

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

Post by sometalk »

hithere wrote: Wed Feb 02, 2022 3:06 pm
sometalk wrote: Wed Feb 02, 2022 1:46 pm hello all. trying to learn the mechanics of this on IB before even thinking of trying to execute a trade. I am trying to follow https://earlyretirementnow.com/2021/12/ ... ox-spread/ but using the IBKR website instead of TWS.

Code: Select all

Options Combo

1. Sell 1 SPX OPT DEC 14 '23 4500 Call (100) @CBOE
2. Buy 1 SPX OPT DEC 14 '23 4600 Call (100) @CBOE
3. Buy 1 SPX OPT DEC 14 '23 4500 Put (100) @CBOE
4. Sell 1 SPX OPT DEC 14 '23 4600 Put (100) @CBOE
That is what my order ticket looks like.

Code: Select all

Buy1 {ticker} for about -9,770 USD
Amount	        -9,769.58 USD
Order Type	 Limit
Limit Price     -97.35 Credit
Time-In-Force	Day

Commission (est.)	6.17 USD
Total	               -9,763.41 USD
However this box spread is going to change my margin requirements, which I think (if I understand the mechanics of it right), is not supposed to happen.
Image

I am definitely doing something wrong, but trying to figure out what.
This options combo is correct. Is your account portfolio margin?

P.S. I just tried simulating this trade from my account a few times and each time IB showed very different projections for the post-trade EWL, IM and MM. You should probably try doing it again. In my case, after retrying a few times, it settled for a ~$65 increase in IM and MM, which seems about right.
switched to Portfolio Margin, still see the same net result; buying a box (with a negative limit price) is resulting in a change in my margin requirements. Any pointers on what else I might be doing wrong?
adamhg
Posts: 218
Joined: Sat Apr 10, 2021 8:40 am

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

Post by adamhg »

klaus14 wrote: Mon Feb 07, 2022 6:03 pm Can you explain why you are long boxes?

I am also considering being long in boxes instead of holding treasuries or CDs because
- "interest" is capital gains.
- higher interest than treasuries. and currently higher than CDs

I am wondering if there is any downside to this compared to treasuries. I guess at times of crisis the spread between treasuries and boxes would widen so the boxes you hold would be worth less. To mitigate this i am considering having a "box ladder" to fund retirement expenses like: 1y box + 2y box + 3y box + 4y box + 5y box. in this way you wouldn't have to sell them prematurely.
I think this warrants a whole new thread. I've been reluctant to distract too much from the short side that's going on here. But I'm using long box spreads as a cash/money market replacement. My read of the study Fxmove88 posted was that the largest benefit of a long box spread would be for the shortest durations, because if the premium is fixed across all tenors, then it increases as a proportion to the treasury rate as the rate decreases.

We hold ~2 years of emergency funds in cash (not my decision :| ). So rather than that, I'm keeping about 3 months and putting the rest in long box spreads about 3-6 months out. Liquidity during a crash is less of a concern in my position, and the biggest risk is if the OCC somehow became insolvent.

I've also increasingly noticed more of this type of verbiage from institutions which suggest that professionals have at least some of the same thought process. This statement is usually without that last part, so I'd expect the funds that add it are probably adding it for a reason:
The Advisor may allocate a portion of the Fund’s assets to cash or cash equivalents, including United States Treasury Securities, money-market instruments, money-market mutual funds or option “box spreads.”
That's not to say that I don't also think long box spreads would also be a good replacement for short term treasuries as well. Having an extra half a percent from a box is a good tradeoff for the increased risk of OCC defaulting vs US Govt. These days, the OCC might arguably be less risky. If I held short term treasuries, I would probably swap them all out for a box ladder like you're suggesting.

Funnily enough, I came across this article today that has some additional points. https://thefinancebuff.com/long-box-spr ... elity.html I wonder if the author is a poster here :)
drk
Posts: 3943
Joined: Mon Jul 24, 2017 10:33 pm

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

Post by drk »

adamhg wrote: Tue Feb 08, 2022 4:16 pm Funnily enough, I came across this article today that has some additional points. https://thefinancebuff.com/long-box-spr ... elity.html I wonder if the author is a poster here :)
I'll do you one better: TFB has a Bogleheads wiki page. :D
A useful razor: anyone asking about speculative strategies on Bogleheads.org has no business using them.
comeinvest
Posts: 2709
Joined: Mon Mar 12, 2012 6:57 pm

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

Post by comeinvest »

adamhg wrote: Tue Feb 08, 2022 4:16 pm My read of the study Fxmove88 posted was that the largest benefit of a long box spread would be for the shortest durations, because if the premium is fixed across all tenors, then it increases as a proportion to the treasury rate as the rate decreases.
Can you please illustrate this difference in benefits that you mention, in the context that you are thinking of?
The context that I have in mind is that of parking a certain fixed amount unleveraged cash. It cannot be leverage, because in the case of leverage, the cost of leverage above the risk-free rate and the spread of a long box position above the risk-free rate would offset at best.
So you get a fixed dollar benefit as excess return for the amount of your available cash from the spread above the risk-free rate per the chart that Fxmove88 posted and that klaus14 re-posted a few comments above, regardless your decision what box maturity you choose. The relative return in relation to the return of the underlying investment that you simulate (e.g. 3-months T-Bills or 5-year treasuries) shouldn't matter. Am I missing something?
adamhg
Posts: 218
Joined: Sat Apr 10, 2021 8:40 am

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

Post by adamhg »

comeinvest wrote: Tue Feb 08, 2022 8:58 pm
adamhg wrote: Tue Feb 08, 2022 4:16 pm My read of the study Fxmove88 posted was that the largest benefit of a long box spread would be for the shortest durations, because if the premium is fixed across all tenors, then it increases as a proportion to the treasury rate as the rate decreases.
Can you please illustrate this difference in benefits that you mention, in the context that you are thinking of?
The context that I have in mind is that of parking a certain fixed amount unleveraged cash. It cannot be leverage, because in the case of leverage, the cost of leverage above the risk-free rate and the spread of a long box position above the risk-free rate would offset at best.
So you get a fixed dollar benefit as excess return for the amount of your available cash from the spread above the risk-free rate per the chart that Fxmove88 posted and that klaus14 re-posted a few comments above, regardless your decision what box maturity you choose. The relative return in relation to the return of the underlying investment that you simulate (e.g. 3-months T-Bills or 5-year treasuries) shouldn't matter. Am I missing something?
That's another way to look at it. Since it's fixed dollar benefit as excess return, you want to maximize turns per year. So with a three month, you turn that same amount of available cash over 4x to generate 4x the excess return of a year, etc. Technically you'd probably want the 1-2mo boxes to increase the turns even more, but those tenors seem to be quite noisy and commission starts to eat in unless you have some decent size.
comeinvest
Posts: 2709
Joined: Mon Mar 12, 2012 6:57 pm

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

Post by comeinvest »

adamhg wrote: Tue Feb 08, 2022 9:22 pm That's another way to look at it. Since it's fixed dollar benefit as excess return, you want to maximize turns per year. So with a three month, you turn that same amount of available cash over 4x to generate 4x the excess return of a year, etc. Technically you'd probably want the 1-2mo boxes to increase the turns even more, but those tenors seem to be quite noisy and commission starts to eat in unless you have some decent size.
I think you got it wrong. I don't have the paper in front of me, but I'm pretty sure the yield spreads of ca. 0.35% in the diagram are annualized. If for example you use 3 months boxes, you would harvest 1/4 of 0.35% each time you roll or renew your box, or 0.35% per year. If you use a 5-year box, you would harvest 5 * 0.35% when you buy the box as an additional discount to the notional value of the box, or 0.35% per year. I'm surprised that you have the idea that you can make 1%+ per year above T-Bills, as your boxtrades.com shows pretty consistent financing rates of 0.3%-0.5% APY above T-Bill rates.
adamhg
Posts: 218
Joined: Sat Apr 10, 2021 8:40 am

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

Post by adamhg »

comeinvest wrote: Tue Feb 08, 2022 9:39 pm
adamhg wrote: Tue Feb 08, 2022 9:22 pm That's another way to look at it. Since it's fixed dollar benefit as excess return, you want to maximize turns per year. So with a three month, you turn that same amount of available cash over 4x to generate 4x the excess return of a year, etc. Technically you'd probably want the 1-2mo boxes to increase the turns even more, but those tenors seem to be quite noisy and commission starts to eat in unless you have some decent size.
I think you got it wrong. I don't have the paper in front of me, but I'm pretty sure the yield spreads of ca. 0.35% in the diagram are annualized. If for example you use 3 months boxes, you would harvest 1/4 of 0.35% each time you roll or renew your box, or 0.35% per year. If you use a 5-year box, you would harvest 5 * 0.35% when you buy the box as an additional discount to the notional value of the box, or 0.35% per year.
I think you're probably right on quick reflection. But it's not worse off at least.
hithere
Posts: 198
Joined: Sat Mar 31, 2018 5:30 am

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

Post by hithere »

sometalk wrote: Tue Feb 08, 2022 7:37 am
hithere wrote: Wed Feb 02, 2022 3:06 pm
sometalk wrote: Wed Feb 02, 2022 1:46 pm hello all. trying to learn the mechanics of this on IB before even thinking of trying to execute a trade. I am trying to follow https://earlyretirementnow.com/2021/12/ ... ox-spread/ but using the IBKR website instead of TWS.

Code: Select all

Options Combo

1. Sell 1 SPX OPT DEC 14 '23 4500 Call (100) @CBOE
2. Buy 1 SPX OPT DEC 14 '23 4600 Call (100) @CBOE
3. Buy 1 SPX OPT DEC 14 '23 4500 Put (100) @CBOE
4. Sell 1 SPX OPT DEC 14 '23 4600 Put (100) @CBOE
That is what my order ticket looks like.

Code: Select all

Buy1 {ticker} for about -9,770 USD
Amount	        -9,769.58 USD
Order Type	 Limit
Limit Price     -97.35 Credit
Time-In-Force	Day

Commission (est.)	6.17 USD
Total	               -9,763.41 USD
However this box spread is going to change my margin requirements, which I think (if I understand the mechanics of it right), is not supposed to happen.
Image

I am definitely doing something wrong, but trying to figure out what.
This options combo is correct. Is your account portfolio margin?

P.S. I just tried simulating this trade from my account a few times and each time IB showed very different projections for the post-trade EWL, IM and MM. You should probably try doing it again. In my case, after retrying a few times, it settled for a ~$65 increase in IM and MM, which seems about right.
switched to Portfolio Margin, still see the same net result; buying a box (with a negative limit price) is resulting in a change in my margin requirements. Any pointers on what else I might be doing wrong?
Unfortunately, I don't have any other suggestions. I guess your best bet is to ask the support.
sometalk
Posts: 36
Joined: Thu Jul 20, 2017 9:38 am
Location: Greater Boston

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

Post by sometalk »

hithere wrote: Tue Feb 08, 2022 10:17 pm
sometalk wrote: Tue Feb 08, 2022 7:37 am
hithere wrote: Wed Feb 02, 2022 3:06 pm
sometalk wrote: Wed Feb 02, 2022 1:46 pm hello all. trying to learn the mechanics of this on IB before even thinking of trying to execute a trade. I am trying to follow https://earlyretirementnow.com/2021/12/ ... ox-spread/ but using the IBKR website instead of TWS.

Code: Select all

Options Combo

1. Sell 1 SPX OPT DEC 14 '23 4500 Call (100) @CBOE
2. Buy 1 SPX OPT DEC 14 '23 4600 Call (100) @CBOE
3. Buy 1 SPX OPT DEC 14 '23 4500 Put (100) @CBOE
4. Sell 1 SPX OPT DEC 14 '23 4600 Put (100) @CBOE
That is what my order ticket looks like.

Code: Select all

Buy1 {ticker} for about -9,770 USD
Amount	        -9,769.58 USD
Order Type	 Limit
Limit Price     -97.35 Credit
Time-In-Force	Day

Commission (est.)	6.17 USD
Total	               -9,763.41 USD
However this box spread is going to change my margin requirements, which I think (if I understand the mechanics of it right), is not supposed to happen.
Image

I am definitely doing something wrong, but trying to figure out what.
This options combo is correct. Is your account portfolio margin?

P.S. I just tried simulating this trade from my account a few times and each time IB showed very different projections for the post-trade EWL, IM and MM. You should probably try doing it again. In my case, after retrying a few times, it settled for a ~$65 increase in IM and MM, which seems about right.
switched to Portfolio Margin, still see the same net result; buying a box (with a negative limit price) is resulting in a change in my margin requirements. Any pointers on what else I might be doing wrong?
Unfortunately, I don't have any other suggestions. I guess your best bet is to ask the support.
huh, i tried again this morning and now, IM and MM are seeing very minimal change. maybe the Portfolio Margin change has a lag to it?
hithere
Posts: 198
Joined: Sat Mar 31, 2018 5:30 am

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

Post by hithere »

sometalk wrote: Wed Feb 09, 2022 7:10 am
hithere wrote: Tue Feb 08, 2022 10:17 pm
sometalk wrote: Tue Feb 08, 2022 7:37 am
hithere wrote: Wed Feb 02, 2022 3:06 pm
sometalk wrote: Wed Feb 02, 2022 1:46 pm hello all. trying to learn the mechanics of this on IB before even thinking of trying to execute a trade. I am trying to follow https://earlyretirementnow.com/2021/12/ ... ox-spread/ but using the IBKR website instead of TWS.

Code: Select all

Options Combo

1. Sell 1 SPX OPT DEC 14 '23 4500 Call (100) @CBOE
2. Buy 1 SPX OPT DEC 14 '23 4600 Call (100) @CBOE
3. Buy 1 SPX OPT DEC 14 '23 4500 Put (100) @CBOE
4. Sell 1 SPX OPT DEC 14 '23 4600 Put (100) @CBOE
That is what my order ticket looks like.

Code: Select all

Buy1 {ticker} for about -9,770 USD
Amount	        -9,769.58 USD
Order Type	 Limit
Limit Price     -97.35 Credit
Time-In-Force	Day

Commission (est.)	6.17 USD
Total	               -9,763.41 USD
However this box spread is going to change my margin requirements, which I think (if I understand the mechanics of it right), is not supposed to happen.
Image

I am definitely doing something wrong, but trying to figure out what.
This options combo is correct. Is your account portfolio margin?

P.S. I just tried simulating this trade from my account a few times and each time IB showed very different projections for the post-trade EWL, IM and MM. You should probably try doing it again. In my case, after retrying a few times, it settled for a ~$65 increase in IM and MM, which seems about right.
switched to Portfolio Margin, still see the same net result; buying a box (with a negative limit price) is resulting in a change in my margin requirements. Any pointers on what else I might be doing wrong?
Unfortunately, I don't have any other suggestions. I guess your best bet is to ask the support.
huh, i tried again this morning and now, IM and MM are seeing very minimal change. maybe the Portfolio Margin change has a lag to it?
Usually account changes take effect on the next business day. I was actually thinking of mentioning that, but I thought it wasn't the likely cause, so I didn't. Anyway, cograts on getting things working. Use your new power wisely. :sharebeer
jshaffer740
Posts: 143
Joined: Mon May 03, 2010 7:21 pm

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

Post by jshaffer740 »

I’m considering shorting a box in a RegT account at Interactive Brokers and want to make sure I understand the implications for margin requirements.

IB says that in a RegT margin account, the initial, RegT, and maintenance margin requirements are the same—the greater of either (1) 1.02 * cost to close or (2) the difference between the short call strike and the long call strike.

I understand the second option—that would simply equal the spread * 100 (I.e., the amount I’m borrowing). But what is the first option? Is the “cost to close” the daily marked-to-market value of the box? And is this the aspect of selling box spreads in a RegT account at IB that makes people nervous?

Putting those questions aside, let me make sure I understand how this would work. Assume I have $50k in net liquidation value—composed of $75k in equity securities, and a $25k margin loan. My maintenance margin would be $18.5k, and my RegT margin would be $37.5k.

If I short a box for $25k, both my maintenance margin and RegT margin would increase by that amount—to $43.5k and $62.5k, respectively. But my NLV would increase by the same amount—to $75k. So the *effective* cushion between my NLV and the margin requirements on my equity securities remains unchanged by shorting the box. In other words, although shorting the box spread nominally affects my margin requirements, it doesn’t actually reduce my buying power.

Do I have that right?
1.5x leverage | 45% market-cap [VTI, VEA, VWO] + 45% factor tilted [AVUV, AVDV, AVES] + 10% trend following [KMLM, DBMF]
hithere
Posts: 198
Joined: Sat Mar 31, 2018 5:30 am

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

Post by hithere »

jshaffer740 wrote: Wed Feb 09, 2022 10:58 am I’m considering shorting a box in a RegT account at Interactive Brokers and want to make sure I understand the implications for margin requirements.

IB says that in a RegT margin account, the initial, RegT, and maintenance margin requirements are the same—the greater of either (1) 1.02 * cost to close or (2) the difference between the short call strike and the long call strike.

I understand the second option—that would simply equal the spread * 100 (I.e., the amount I’m borrowing). But what is the first option? Is the “cost to close” the daily marked-to-market value of the box? And is this the aspect of selling box spreads in a RegT account at IB that makes people nervous?

Putting those questions aside, let me make sure I understand how this would work. Assume I have $50k in net liquidation value—composed of $75k in equity securities, and a $25k margin loan. My maintenance margin would be $18.5k, and my RegT margin would be $37.5k.

If I short a box for $25k, both my maintenance margin and RegT margin would increase by that amount—to $43.5k and $62.5k, respectively. But my NLV would increase by the same amount—to $75k. So the *effective* cushion between my NLV and the margin requirements on my equity securities remains unchanged by shorting the box. In other words, although shorting the box spread nominally affects my margin requirements, it doesn’t actually reduce my buying power.

Do I have that right?
I have no experience with or much knowledge of RegT margin, so take what I say with a big grain of salt.

In the first case, assuming your maintenance margin requirement is actually 25% on equity, then your maintenance margin would be $18.75K and RegT margin would be $37.5K. One question though - isn't your portfolio supposed to conform to the RegT margin requirement at the end of each trading day? I may be wrong about this.

Regarding the second case - let's switch from Net Liquidation Value to Equity With Loan, since this is the metric IB uses in determining whether to liquidate your positions. Your maintenance margin would be $43.75K indeed, however your EWL would still be $50K (perhaps slightly lower to be precise), so you would be dangerously close to liquidation. If you must conform to the RegT requirement at the end of the day as I suspect, then the picture gets even more grim.
Dry-Drink
Posts: 530
Joined: Fri Jan 14, 2022 9:50 am

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

Post by Dry-Drink »

jshaffer740 wrote: Wed Feb 09, 2022 10:58 am
If I short a box for $25k, both my maintenance margin and RegT margin would increase by that amount—to $43.5k and $62.5k, respectively. But my NLV would increase by the same amount—to $75k.
No, the NLV value is the value of the account if you liquidate everything. Buying or selling anything in the account will have no effect on the NLV (aside from commissions and spreads).
jshaffer740
Posts: 143
Joined: Mon May 03, 2010 7:21 pm

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

Post by jshaffer740 »

Dry-Drink wrote: Wed Feb 09, 2022 12:34 pm
jshaffer740 wrote: Wed Feb 09, 2022 10:58 am
If I short a box for $25k, both my maintenance margin and RegT margin would increase by that amount—to $43.5k and $62.5k, respectively. But my NLV would increase by the same amount—to $75k.
No, the NLV value is the value of the account if you liquidate everything. Buying or selling anything in the account will have no effect on the NLV (aside from commissions and spreads).
Ah, okay. Yes—as the poster above you correctly pointed out, the metric that matters is “equity with loan value,” not NLV. Would “equity with loan value” increase by $25k?

I suppose I’m just trying to understand the nuts and bolts for why a box spread isn’t effectively neutral for my margin requirements and risk of liquidation.
1.5x leverage | 45% market-cap [VTI, VEA, VWO] + 45% factor tilted [AVUV, AVDV, AVES] + 10% trend following [KMLM, DBMF]
hithere
Posts: 198
Joined: Sat Mar 31, 2018 5:30 am

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

Post by hithere »

jshaffer740 wrote: Wed Feb 09, 2022 1:09 pm
Dry-Drink wrote: Wed Feb 09, 2022 12:34 pm
jshaffer740 wrote: Wed Feb 09, 2022 10:58 am
If I short a box for $25k, both my maintenance margin and RegT margin would increase by that amount—to $43.5k and $62.5k, respectively. But my NLV would increase by the same amount—to $75k.
No, the NLV value is the value of the account if you liquidate everything. Buying or selling anything in the account will have no effect on the NLV (aside from commissions and spreads).
Ah, okay. Yes—as the poster above you correctly pointed out, the metric that matters is “equity with loan value,” not NLV. Would “equity with loan value” increase by $25k?
It wouldn't make sense for EWL to increase when you buy a short box, since the latter has a negative value. I actually went through the exact same process that you're describing, although in a portfolio margin account - I replaced my margin loan with a short box spread.

Ignoring the small differences caused by commissions and spreads, you would have:

Case 1:
Market value of equities: $75K
Cash: -$25K (margin loan)
EWL: $50K

Case 2:
Market value of equities: $75K
Market value of options: -$25K
Cash: $0
EWL: $50K

This is what IB shows when you have a margin loan vs. a short box.
Dry-Drink
Posts: 530
Joined: Fri Jan 14, 2022 9:50 am

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

Post by Dry-Drink »

jshaffer740 wrote: Wed Feb 09, 2022 1:09 pm
Dry-Drink wrote: Wed Feb 09, 2022 12:34 pm
jshaffer740 wrote: Wed Feb 09, 2022 10:58 am
If I short a box for $25k, both my maintenance margin and RegT margin would increase by that amount—to $43.5k and $62.5k, respectively. But my NLV would increase by the same amount—to $75k.
No, the NLV value is the value of the account if you liquidate everything. Buying or selling anything in the account will have no effect on the NLV (aside from commissions and spreads).
Ah, okay. Yes—as the poster above you correctly pointed out, the metric that matters is “equity with loan value,” not NLV. Would “equity with loan value” increase by $25k?
Yes, it does. Your excess liquidity should be the same before and after.
jshaffer740 wrote: Wed Feb 09, 2022 1:09 pm I suppose I’m just trying to understand the nuts and bolts for why a box spread isn’t effectively neutral for my margin requirements and risk of liquidation.
It is, who says it isn't?
hithere wrote: Wed Feb 09, 2022 1:29 pm
It wouldn't make sense for EWL to increase when you buy a short box, since the latter has a negative value.
It definitely does, the OP of this very thread even shows it here:
viewtopic.php?p=5917318#p5917318

The quick way to remember it is in PM, neither MM nor EWL change by selling a box. With Reg T, they both increase by about the same.
hithere
Posts: 198
Joined: Sat Mar 31, 2018 5:30 am

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

Post by hithere »

Dry-Drink wrote: Wed Feb 09, 2022 1:42 pm It definitely does, the OP of this very thread even shows it here:
viewtopic.php?p=5917318#p5917318
I don't know what to make of this. Perhaps a mistake on the OP's part? This is not how EWL is calculated for my account at all. In fact, I just pulled up the options chain and an SPX short box with a $100 difference between the strikes bought through a market order is projected to reduce my EWL by about $1,200. No increase in EWL at all.

From this page:

Equity with Loan Value = Total Cash Value + Stock Value + Bond Value + Fund Value + European & Asian Options Value

And as I said, a short box has a negative value, so it reduces EWL.
Last edited by hithere on Wed Feb 09, 2022 1:51 pm, edited 1 time in total.
jshaffer740
Posts: 143
Joined: Mon May 03, 2010 7:21 pm

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

Post by jshaffer740 »

hithere wrote: Wed Feb 09, 2022 12:16 pmOne question though - isn't your portfolio supposed to conform to the RegT margin requirement at the end of each trading day? I may be wrong about this.
Thanks for that question--I think it clears up a mistake in the scenario I laid out. You're right that IB checks RegT margin at 3:50 pm each day. But as I understand it--and believe me, I'm going to make sure I understand it inside and out before making a trade--the daily RegT margin requirement equals only "today's trades initial margin requirements” (see https://www.interactivebrokers.com/en/g ... rgin.php#2).

So yes, I think I'd run into RegT trouble if I tried to buy the equity ETFs and short the box all in the same day--since the Reg T margin requirement for that day would equal the initial margin requirement those trades. But if those trades happened on separate days, the Reg T margin requirement would not include the prior day's trades.
hithere wrote: Wed Feb 09, 2022 12:16 pmRegarding the second case - let's switch from Net Liquidation Value to Equity With Loan, since this is the metric IB uses in determining whether to liquidate your positions. Your maintenance margin would be $43.75K indeed, however your EWL would still be $50K (perhaps slightly lower to be precise), so you would be dangerously close to liquidation. If you must conform to the RegT requirement at the end of the day as I suspect, then the picture gets even more grim.
I think that distinction addresses at least your RegT concern above (but not your maintenance margin concern). Let's break this up into two days and see how things would work--assuming that the equities remain flat between Day 1 and Day 2.

Day 1
  • Transaction: Buy $75,000 of VOO with $50,000 cash and $25,000 margin
  • Reg T Initial margin requirement: $37,500 (50% of VOO)
  • End of day margin requirement: $37,500
  • Equity with loan value: $50,000 ($75,000 VOO + negative $25,000 cash balance)
  • End of day RegT cushion: $12,500 ($50,000 - $37,500) [room for a ~17% drop in VOO]
  • Maintenance margin: $18,750 (25% of VOO)
  • End of day maintenance cushion: $31,250 ($50,000 - $18,750) [room for a ~42% drop in VOO]
Day 2
  • Transaction: Short $25,000 box spread
  • Reg T Initial margin requirement: $25,000 (100% of spread)
  • End of day margin requirement: $25,000
  • Equity with loan value: $50,000 ($75,000 VOO + negative $25,000 box spread balance)
  • End of day RegT cushion: $25,000 ($50,000 - $25,000) [room for a ~33% drop in VOO]
  • Maintenance margin: $43,750 (25% of VOO + box spread's initial margin requirement)
  • End of day maintenance cushion: $6,250 ($50,000 - $43,750) [room for 12.5% drop in VOO]
If this is correct, then it seems to me that the problem is not the end-of-day margin requirement, it's the maintenance margin requirement. As best I can tell, IB would treat this a a short box spread and would require a maintenance margin equal to the initial margin, which in turn equals the spread (see https://www.interactivebrokers.com/en/t ... ptions.php).

Does that seem right? I can't understand why IB would require a 100% maintenance margin on a box spread and only 25% on an equity position, so something feels off. But if that's indeed how it would work, then I can see why doing this without Portfolio Margin is asking for trouble.

Edit: In other words, merely swapping margin debt for box spread debt has the effect of cutting my maintenance cushion five-fold. That can't be right, can it?
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by Dry-Drink »

jshaffer740 wrote: Wed Feb 09, 2022 1:51 pm
hithere wrote: Wed Feb 09, 2022 12:16 pmOne question though - isn't your portfolio supposed to conform to the RegT margin requirement at the end of each trading day? I may be wrong about this.
Thanks for that question--I think it clears up a mistake in the scenario I laid out. You're right that IB checks RegT margin at 3:50 pm each day. But as I understand it--and believe me, I'm going to make sure I understand it inside and out before making a trade--the daily RegT margin requirement equals only "today's trades initial margin requirements” (see https://www.interactivebrokers.com/en/g ... rgin.php#2).

So yes, I think I'd run into RegT trouble if I tried to buy the equity ETFs and short the box all in the same day--since the Reg T margin requirement for that day would equal the initial margin requirement those trades. But if those trades happened on separate days, the Reg T margin requirement would not include the prior day's trades.
hithere wrote: Wed Feb 09, 2022 12:16 pmRegarding the second case - let's switch from Net Liquidation Value to Equity With Loan, since this is the metric IB uses in determining whether to liquidate your positions. Your maintenance margin would be $43.75K indeed, however your EWL would still be $50K (perhaps slightly lower to be precise), so you would be dangerously close to liquidation. If you must conform to the RegT requirement at the end of the day as I suspect, then the picture gets even more grim.
I think that distinction addresses at least your RegT concern above (but not your maintenance margin concern). Let's break this up into two days and see how things would work--assuming that the equities remain flat between Day 1 and Day 2.

Day 1
  • Transaction: Buy $75,000 of VOO with $50,000 cash and $25,000 margin
  • Reg T Initial margin requirement: $37,500 (50% of VOO)
  • End of day margin requirement: $37,500
  • Equity with loan value: $50,000 ($75,000 VOO + negative $25,000 cash balance)
  • End of day RegT cushion: $12,500 ($50,000 - $37,500) [room for a ~17% drop in VOO]
  • Maintenance margin: $18,750 (25% of VOO)
  • End of day maintenance cushion: $31,250 ($50,000 - $18,750) [room for a ~42% drop in VOO]
Day 2
  • Transaction: Short $25,000 box spread
  • Reg T Initial margin requirement: $25,000 (100% of spread)
  • End of day margin requirement: $25,000
  • Equity with loan value: $50,000 ($75,000 VOO + negative $25,000 box spread balance)
  • End of day RegT cushion: $25,000 ($50,000 - $25,000) [room for a ~33% drop in VOO]
  • Maintenance margin: $43,750 (25% of VOO + box spread's initial margin requirement)
  • End of day maintenance cushion: $6,250 ($50,000 - $43,750) [room for 12.5% drop in VOO]
If this is correct, then it seems to me that the problem is not the end-of-day margin requirement, it's the maintenance margin requirement. As best I can tell, IB would treat this a a short box spread and would require a maintenance margin equal to the initial margin, which in turn equals the spread (see https://www.interactivebrokers.com/en/t ... ptions.php).

Does that seem right? I can't understand why IB would require a 100% maintenance margin on a box spread and only 25% on an equity position, so something feels off. But if that's indeed how it would work, then I can see why doing this without Portfolio Margin is asking for trouble.
You can definitely short the box and buy the ETFs on the same day. SMA is unaffected by box trades in Reg T so I know you wouldn't have to wait. I'll look at your numbers later perhaps.
hithere wrote: Wed Feb 09, 2022 1:48 pm
Dry-Drink wrote: Wed Feb 09, 2022 1:42 pm It definitely does, the OP of this very thread even shows it here:
viewtopic.php?p=5917318#p5917318
I don't know what to make of this. Perhaps a mistake on the OP's part? This is not how EWL is calculated for my account at all. In fact, I just pulled up the options chain and an SPX short box with a $100 difference between the strikes bought through a market order is projected to reduce my EWL by about $1,200. No increase in EWL at all.

From this page:

Equity with Loan Value = Total Cash Value + Stock Value + Bond Value + Fund Value + European & Asian Options Value

And as I said, a short box has a negative value, so it reduces EWL.
No, buying long options reduces EWL because long options aren't margineable. If you had 1M in cash and bought 1M puts, your EWL would be zero, not 1M. An account that just has 1M puts can't borrow anything and has no equity for purposes of borrowing (EWL=0).

Doing the opposite nets, well, the opposite. Selling 1M puts will bump up your EWL by 1M.

In a PM account, things work more how you're thinking about it. Your EWL will track very closely your NLV (minus any futures collateral) regardless of your options sleeve.
jshaffer740
Posts: 143
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by jshaffer740 »

Dry-Drink wrote: Wed Feb 09, 2022 2:04 pm
You can definitely short the box and buy the ETFs on the same day. SMA is unaffected by box trades in Reg T so I know you wouldn't have to wait. I'll look at your numbers later perhaps.
Ah yes, good point. IB's end-of-day margin check considers your SMA too. So long as your SMA is >0, you will pass IB's end-of-day Reg T check. And as you say, shorting the box does not affect your SMA, which = prior day's SMA +/- change in cash +/- today's trades' initial margin requirements.
Dry-Drink wrote: Wed Feb 09, 2022 1:42 pm
No, buying long options reduces EWL because long options aren't margineable. If you had 1M in cash and bought 1M puts, your EWL would be zero, not 1M. An account that just has 1M puts can't borrow anything and has no equity for purposes of borrowing (EWL=0).

Doing the opposite nets, well, the opposite. Selling 1M puts will bump up your EWL by 1M.
This is how I originally understood things. If that's correct, then it would all work how I'd intuitively expect it to--shorting the box and using margin are--from a margin-requirement standpoint in a a Reg T account--the same. If you replace the $50,000 in my numbers above with $75,000, it all washes out.

Edit: That does seem to be how things work (which makes sense). I just previewed selling the box in TWS. According to the projected margin impact of the spread, the spread does indeed increase the initial margin, maintenance margin and the EWL by the spread.
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by Dry-Drink »

jshaffer740 wrote: Wed Feb 09, 2022 2:16 pm
Dry-Drink wrote: Wed Feb 09, 2022 2:04 pm
You can definitely short the box and buy the ETFs on the same day. SMA is unaffected by box trades in Reg T so I know you wouldn't have to wait. I'll look at your numbers later perhaps.
Ah yes, good point. IB's end-of-day margin check considers your SMA too. So long as your SMA is >0, you will pass IB's end-of-day Reg T check. And as you say, shorting the box does not affect your SMA, which = prior day's SMA +/- change in cash +/- today's trades' initial margin requirements.
You got it! Only one comment: the SMA check really IS Reg T check. I can let you chew on that thought.
jshaffer740 wrote: Wed Feb 09, 2022 2:16 pm
Dry-Drink wrote: Wed Feb 09, 2022 1:42 pm
No, buying long options reduces EWL because long options aren't margineable. If you had 1M in cash and bought 1M puts, your EWL would be zero, not 1M. An account that just has 1M puts can't borrow anything and has no equity for purposes of borrowing (EWL=0).

Doing the opposite nets, well, the opposite. Selling 1M puts will bump up your EWL by 1M.
This is how I originally understood things. If that's correct, then it would all work how I'd intuitively expect it to--shorting the box and using margin are--from a margin-requirement standpoint in a a Reg T account--the same.
At least at IBKR. I recall some peeps earlier in the thread were saying Schwab was problematic for this (as in, they were seeing a reduction of excess liquidity from shorting a box). That would be a problem. I only read a little of this thread but this fella on the first page has it right:
viewtopic.php?p=5918647#p5918647
hithere
Posts: 198
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by hithere »

jshaffer740 wrote: Wed Feb 09, 2022 1:51 pm
hithere wrote: Wed Feb 09, 2022 12:16 pmOne question though - isn't your portfolio supposed to conform to the RegT margin requirement at the end of each trading day? I may be wrong about this.
Thanks for that question--I think it clears up a mistake in the scenario I laid out. You're right that IB checks RegT margin at 3:50 pm each day. But as I understand it--and believe me, I'm going to make sure I understand it inside and out before making a trade--the daily RegT margin requirement equals only "today's trades initial margin requirements” (see https://www.interactivebrokers.com/en/g ... rgin.php#2).

So yes, I think I'd run into RegT trouble if I tried to buy the equity ETFs and short the box all in the same day--since the Reg T margin requirement for that day would equal the initial margin requirement those trades. But if those trades happened on separate days, the Reg T margin requirement would not include the prior day's trades.
hithere wrote: Wed Feb 09, 2022 12:16 pmRegarding the second case - let's switch from Net Liquidation Value to Equity With Loan, since this is the metric IB uses in determining whether to liquidate your positions. Your maintenance margin would be $43.75K indeed, however your EWL would still be $50K (perhaps slightly lower to be precise), so you would be dangerously close to liquidation. If you must conform to the RegT requirement at the end of the day as I suspect, then the picture gets even more grim.
I think that distinction addresses at least your RegT concern above (but not your maintenance margin concern). Let's break this up into two days and see how things would work--assuming that the equities remain flat between Day 1 and Day 2.

Day 1
  • Transaction: Buy $75,000 of VOO with $50,000 cash and $25,000 margin
  • Reg T Initial margin requirement: $37,500 (50% of VOO)
  • End of day margin requirement: $37,500
  • Equity with loan value: $50,000 ($75,000 VOO + negative $25,000 cash balance)
  • End of day RegT cushion: $12,500 ($50,000 - $37,500) [room for a ~17% drop in VOO]
  • Maintenance margin: $18,750 (25% of VOO)
  • End of day maintenance cushion: $31,250 ($50,000 - $18,750) [room for a ~42% drop in VOO]
Day 2
  • Transaction: Short $25,000 box spread
  • Reg T Initial margin requirement: $25,000 (100% of spread)
  • End of day margin requirement: $25,000
  • Equity with loan value: $50,000 ($75,000 VOO + negative $25,000 box spread balance)
  • End of day RegT cushion: $25,000 ($50,000 - $25,000) [room for a ~33% drop in VOO]
  • Maintenance margin: $43,750 (25% of VOO + box spread's initial margin requirement)
  • End of day maintenance cushion: $6,250 ($50,000 - $43,750) [room for 12.5% drop in VOO]
If this is correct, then it seems to me that the problem is not the end-of-day margin requirement, it's the maintenance margin requirement. As best I can tell, IB would treat this a a short box spread and would require a maintenance margin equal to the initial margin, which in turn equals the spread (see https://www.interactivebrokers.com/en/t ... ptions.php).

Does that seem right? I can't understand why IB would require a 100% maintenance margin on a box spread and only 25% on an equity position, so something feels off. But if that's indeed how it would work, then I can see why doing this without Portfolio Margin is asking for trouble.

Edit: In other words, merely swapping margin debt for box spread debt has the effect of cutting my maintenance cushion five-fold. That can't be right, can it?
When calculating your "room for drops" and cushions, you're forgetting that both EWL and margin requirements are affected by the value of your equities.

Let's take the RegT requirement on day one as an example. You say that a 17% drop (from $75K to $62.5K) would trigger a liquidation. In reality, it's not as simple as dividing your current margin requirement by your current equities value. After a 17% drop, your EWL would be $37.5K ($62.5K equities - $25K cash). Your RegT margin wouldn't stay at $37.5K though, it would drop as well to $31.25K. It'd be lower than your EWL, hence your positions still wouldn't be liquidated. Your equities would have to drop by 33% to $50K in order for EWL and the RegT margin requirement to both equal $25K, at which point you would start seeing automatic liquidations.

IB has discretion with regard to their margin requirements, so they could increase every margin requirement on every security to 100% if they really wanted to. Something that might be curious - SPX has a close to 0 IM and MM, however the Euro boxes that I buy have a 100+% IM requirement and close to 0 MM requirement. I asked them about it 10 days ago and I still haven't received a response, but the reason may very well be "just because we can".
Dry-Drink
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by Dry-Drink »

hithere wrote: Wed Feb 09, 2022 2:42 pm IB has discretion with regard to their margin requirements, so they could increase every margin requirement on every security to 100% if they really wanted to.
Bruh don't even joke, I legit started sweating just reading that.
hithere
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by hithere »

Dry-Drink wrote: Wed Feb 09, 2022 2:04 pm
hithere wrote: Wed Feb 09, 2022 1:48 pm
Dry-Drink wrote: Wed Feb 09, 2022 1:42 pm It definitely does, the OP of this very thread even shows it here:
viewtopic.php?p=5917318#p5917318
I don't know what to make of this. Perhaps a mistake on the OP's part? This is not how EWL is calculated for my account at all. In fact, I just pulled up the options chain and an SPX short box with a $100 difference between the strikes bought through a market order is projected to reduce my EWL by about $1,200. No increase in EWL at all.

From this page:

Equity with Loan Value = Total Cash Value + Stock Value + Bond Value + Fund Value + European & Asian Options Value

And as I said, a short box has a negative value, so it reduces EWL.
No, buying long options reduces EWL because long options aren't margineable. If you had 1M in cash and bought 1M puts, your EWL would be zero, not 1M. An account that just has 1M puts can't borrow anything and has no equity for purposes of borrowing (EWL=0).

Doing the opposite nets, well, the opposite. Selling 1M puts will bump up your EWL by 1M.

In a PM account, things work more how you're thinking about it. Your EWL will track very closely your NLV (minus any futures collateral) regardless of your options sleeve.
This is interesting, but according to the formula I posted, the only way for a short box to increase EWL is for IB to assign it positive value. Is this what IB does in RegT margin accounts? @jshaffer740, since you have a RegT margin account, can you please "preview" a market order for a short box on SPX so we can see if it would increase your EWL?
Dry-Drink
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by Dry-Drink »

hithere wrote: Wed Feb 09, 2022 2:47 pm
Dry-Drink wrote: Wed Feb 09, 2022 2:04 pm
hithere wrote: Wed Feb 09, 2022 1:48 pm
Dry-Drink wrote: Wed Feb 09, 2022 1:42 pm It definitely does, the OP of this very thread even shows it here:
viewtopic.php?p=5917318#p5917318
I don't know what to make of this. Perhaps a mistake on the OP's part? This is not how EWL is calculated for my account at all. In fact, I just pulled up the options chain and an SPX short box with a $100 difference between the strikes bought through a market order is projected to reduce my EWL by about $1,200. No increase in EWL at all.

From this page:

Equity with Loan Value = Total Cash Value + Stock Value + Bond Value + Fund Value + European & Asian Options Value

And as I said, a short box has a negative value, so it reduces EWL.
No, buying long options reduces EWL because long options aren't margineable. If you had 1M in cash and bought 1M puts, your EWL would be zero, not 1M. An account that just has 1M puts can't borrow anything and has no equity for purposes of borrowing (EWL=0).

Doing the opposite nets, well, the opposite. Selling 1M puts will bump up your EWL by 1M.

In a PM account, things work more how you're thinking about it. Your EWL will track very closely your NLV (minus any futures collateral) regardless of your options sleeve.
This is interesting, but according to the formula I posted, the only way for a short box to increase EWL is for IB to assign it positive value. Is this what IB does in RegT margin accounts? @jshaffer740, since you have a RegT margin account, can you please "preview" a market order for a short box on SPX so we can see how it would indeed increase your EWL?
So I'm not certain but when that formula says "European and Asian Options Value", I think they literally mean options from Europe. If I had to guess, options from the US (whether they have european or american expiration) have zero effect on EWL in Reg T. So when you buy options, your EWL decreases because you have that much less cash (the Total Cash Value decreases and no other term in the formula increases). And when you short options, cash increases (but again, no other term changes).

That is my interpretation.

EDIT: Another way to think about it is that if you transferred some long calls to your IBKR account (again regardless of american or european expiration), your EWL just wouldn't change because options aren't margineable. Your NLV would increase by the value of the option though.
comeinvest
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by comeinvest »

Looking at https://guides.interactivebrokers.com/g ... _value.htm I am having trouble understanding the definition, the concept (as in: what is the formula with EWL in it that governs margin violations), and the ramifications of EWL. The definitions on that page seem to be asymmetric in several ways, for example the commodities portion of EWL has the maintenance margin subtracted, while the securities portion does not.
The formula on that page for the commodities portion seems to imply the requirement that it must be > zero. The formula on that page for the securities portion basically seems to be the total assets (setting aside the curious part with the European/Asian options), but doesn't seem to match the sentence "EWL := The basis for determining whether you have the necessary assets to either initiate or maintain security assets", does it?
So what does "The basis for determining..." mean?
I just cannot make sense out of all this with the mushy language. Why is it so hard to provide accurate definitions, formulas, and margin violation conditions.
richardm
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by richardm »

I may have found another bug with TD Ameritrade. I sold a short duration 4500/4600 box yesterday for a $9,990 credit. Today I "expanded" the box by rolling the two 4600s to 4650 while keeping the same expirations. Another $4,990 credit. My ToS account statement and my account balances reflect the above. OK so far.

Here's the odd part: ToS web says my basis for these four legs is a $14,294 credit and their net liquidation value is -$14,980. In other words, it thinks I have an unrealized loss of $686 on this position. The full desktop ToS doesn't have a cost basis column but in the P/L columns it thinks I'm break-even for the day and $686 in the hole overall. And yes, the market is open right now -- this isn't the result of junky after-hours bid/ask quotes.

I'll let this sit overnight and see if the numbers clean themselves up tomorrow. I'm also curious to see how this reflects on the YTD profit-loss statement on the main TDA web site.
Erdno777
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by Erdno777 »

Hi! I need some help please. I want to know for investors based in EU what is the minimum account to make Box Spreads with IBKR. Does it exists other brokers with I can make box spreads ? Thank you very much for helping me out. I am sorry if I post in wrong section.
comeinvest
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by comeinvest »

richardm wrote: Thu Feb 10, 2022 11:01 am I may have found another bug with TD Ameritrade. I sold a short duration 4500/4600 box yesterday for a $9,990 credit. Today I "expanded" the box by rolling the two 4600s to 4650 while keeping the same expirations. Another $4,990 credit. My ToS account statement and my account balances reflect the above. OK so far.

Here's the odd part: ToS web says my basis for these four legs is a $14,294 credit and their net liquidation value is -$14,980. In other words, it thinks I have an unrealized loss of $686 on this position. The full desktop ToS doesn't have a cost basis column but in the P/L columns it thinks I'm break-even for the day and $686 in the hole overall. And yes, the market is open right now -- this isn't the result of junky after-hours bid/ask quotes.

I'll let this sit overnight and see if the numbers clean themselves up tomorrow. I'm also curious to see how this reflects on the YTD profit-loss statement on the main TDA web site.
I think there is some randomness involved when the broker splits the basis of a trade (the traded price of the complex order) among the 4 legs. Your statements should show how it was split. When you rolled, you might have incurred a realized gain that would later offset with the same unrealized loss on your currently open legs.

But I'm curious how you play boxes with small sizes and short lengths. I found it hard to get the interest rates I wanted, because of the minimum price increment of $0.05, and the high commission in relation to the loan cost. What interest rates do you get for small boxes with short maturities?
Also, interesting concept of "expanding" a box. I see that the expansion involves as many legs (4) as you would have to trade if you were to sell another box. I usually just sell more boxes when I need more money; but I like the idea of expansion, as it would clutter my portfolio view less. Did you calculate what effective rate you got for the expansion?

EDIT: I just realized that the box enlargement is nothing else but another box trade.
Last edited by comeinvest on Tue Feb 15, 2022 2:07 pm, edited 2 times in total.
jshaffer740
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by jshaffer740 »

comeinvest wrote: Thu Feb 10, 2022 5:39 pm
richardm wrote: Thu Feb 10, 2022 11:01 am I may have found another bug with TD Ameritrade. I sold a short duration 4500/4600 box yesterday for a $9,990 credit. Today I "expanded" the box by rolling the two 4600s to 4650 while keeping the same expirations. Another $4,990 credit. My ToS account statement and my account balances reflect the above. OK so far.

Here's the odd part: ToS web says my basis for these four legs is a $14,294 credit and their net liquidation value is -$14,980. In other words, it thinks I have an unrealized loss of $686 on this position. The full desktop ToS doesn't have a cost basis column but in the P/L columns it thinks I'm break-even for the day and $686 in the hole overall. And yes, the market is open right now -- this isn't the result of junky after-hours bid/ask quotes.

I'll let this sit overnight and see if the numbers clean themselves up tomorrow. I'm also curious to see how this reflects on the YTD profit-loss statement on the main TDA web site.
I think there is some randomness involved when the broker splits the basis of a trade (the traded price of the complex order) among the 4 legs. Your statements should show how it was split. When you rolled, you might have incurred a realized gain that would later offset with the same unrealized loss on your currently open legs.

But I'm curious how you play boxes with small sizes and short lengths. I found it hard to get the interest rates I wanted, because of the minimum price increment of $0.05, and the high commission in relation to the loan cost. What interest rates do you get for small boxes with short maturities?
Also, interesting concept of "expanding" a box. I see that the expansion involves as many legs (4) as you would have to trade if you were to sell another box. I usually just sell more boxes when I need more money; but I like the idea of expansion, as it would clutter my portfolio view less. Did you calculate what effective rate you got for the expansion?
I similarly concluded that once you factor in the flat commissions, box spreads don’t make much sense for relatively small amounts—assuming you’re at IBKR and can access their cheap margin rates. Not to mention that the narrower spreads tend to have a wider bid-ask spread.

As for expanding the box, I think you’re better off just letting the old box expire. You incur fewer transaction costs (bid-ask spread, commissions) that way, so your effective interest rate is lower.
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comeinvest
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by comeinvest »

jshaffer740 wrote: Thu Feb 10, 2022 6:02 pm
comeinvest wrote: Thu Feb 10, 2022 5:39 pm I think there is some randomness involved when the broker splits the basis of a trade (the traded price of the complex order) among the 4 legs. Your statements should show how it was split. When you rolled, you might have incurred a realized gain that would later offset with the same unrealized loss on your currently open legs.

But I'm curious how you play boxes with small sizes and short lengths. I found it hard to get the interest rates I wanted, because of the minimum price increment of $0.05, and the high commission in relation to the loan cost. What interest rates do you get for small boxes with short maturities?
Also, interesting concept of "expanding" a box. I see that the expansion involves as many legs (4) as you would have to trade if you were to sell another box. I usually just sell more boxes when I need more money; but I like the idea of expansion, as it would clutter my portfolio view less. Did you calculate what effective rate you got for the expansion?
I similarly concluded that once you factor in the flat commissions, box spreads don’t make much sense for relatively small amounts—assuming you’re at IBKR and can access their cheap margin rates. Not to mention that the narrower spreads tend to have a wider bid-ask spread.

As for expanding the box, I think you’re better off just letting the old box expire. You incur fewer transaction costs (bid-ask spread, commissions) that way, so your effective interest rate is lower.
You won't incur fewer transaction costs. He expanded the size, not the length to maturity, as he needed additional cash before expiration of the original box. In either case, expanding or selling a new box, you would trade an additional 4 legs. Also, the price fluctuations of the trade should be very small in either case. I like the idea, as it would make my portfolio view more readable. Curious what is the effective interest rate of the expansion.
jshaffer740
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by jshaffer740 »

Oh I see—I overlooked the key point about keeping the same maturity. That makes sense.
1.5x leverage | 45% market-cap [VTI, VEA, VWO] + 45% factor tilted [AVUV, AVDV, AVES] + 10% trend following [KMLM, DBMF]
hithere
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by hithere »

Erdno777 wrote: Thu Feb 10, 2022 4:33 pm Hi! I need some help please. I want to know for investors based in EU what is the minimum account to make Box Spreads with IBKR. Does it exists other brokers with I can make box spreads ? Thank you very much for helping me out. I am sorry if I post in wrong section.
As long as you have a risk-based margin account, you can use boxes effectively. Regarding the minimums, I can't speak with certainty, but it looks like in order to create a margin account, you need to declare and provide proof that your liquid net worth is at least 100K euros. I couldn't find any information about this on their website, it's purely an assumption of mine based on the fact that their UI is spitting errors when I try to change my liquid net worth for my margin account to under 100K. Also, this applies to IB Central Europe, which is headquartered in Hungary. Their subsidiaries in Ireland and Luxembourg might have different requirements, although I kind of doubt it. My guess is that this particular requirement is related to the $100K requirement they have in the US, and IB just decided or was required to force it globally, even for clients outside of US.

You can do boxes with other brokers, but depending on your country, IB may very well be the best or even the only decent broker for that purpose. Either way, make sure you understand boxes and margin really well before pulling the trigger. Good luck.
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millennialmillions
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by millennialmillions »

For those just getting started with box spreads, I wrote a paper that includes detailed instructions for how to execute. The main purpose of the paper is to summarize the strategy outlined in skier's Modified HFEA thread, and using box spreads is a small component of that.

I would appreciate any feedback and suggested revisions to this - please PM me your comments or provide your email so I can give comment access to the doc.
tjo
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by tjo »

I have a fundamental question it is about usage of this borrowed money?
What can you do with the borrowed money? it is locked in for margin purposes is it not? for the short BOX
Can somebody please give an example
Lets say a trader has 10K in account and wish to borrow another 30 K which in US won't be possible with traditional margin as it max 1:1
hithere
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by hithere »

tjo wrote: Sun Feb 20, 2022 6:57 pm I have a fundamental question it is about usage of this borrowed money?
What can you do with the borrowed money? it is locked in for margin purposes is it not? for the short BOX
Can somebody please give an example
Lets say a trader has 10K in account and wish to borrow another 30 K which in US won't be possible with traditional margin as it max 1:1
I use short boxes to leverage my long-term portfolio slightly. I can get a better (lower and fixed) interest rate this way as opposed to the higher and variable margin rate offered by IB. So I'm not trading, and I'm certainly nowhere near the 4x leverage from your example.

Speaking of interest rates, do you guys think the longer-term boxes (4, 5, 6, 7, 8 years) are worth the higher interest rate and theoretically higher mark-to-market risk due to lower liquidity? What is the sweet spot in terms of expiration?
comeinvest
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by comeinvest »

hithere wrote: Mon Feb 21, 2022 7:47 am Speaking of interest rates, do you guys think the longer-term boxes (4, 5, 6, 7, 8 years) are worth the higher interest rate and theoretically higher mark-to-market risk due to lower liquidity? What is the sweet spot in terms of expiration?
Where do you see 6, 7, 8 year boxes? The farthest out SPX options that I can see are Dec 2026.
hithere
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by hithere »

comeinvest wrote: Mon Feb 21, 2022 4:31 pm
hithere wrote: Mon Feb 21, 2022 7:47 am Speaking of interest rates, do you guys think the longer-term boxes (4, 5, 6, 7, 8 years) are worth the higher interest rate and theoretically higher mark-to-market risk due to lower liquidity? What is the sweet spot in terms of expiration?
Where do you see 6, 7, 8 year boxes? The farthest out SPX options that I can see are Dec 2026.
Sorry, I should've mentioned that I use Euro boxes, which currently go as far as Dec 2031. :happy
gougou
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by gougou »

hithere wrote: Mon Feb 21, 2022 7:47 am
tjo wrote: Sun Feb 20, 2022 6:57 pm I have a fundamental question it is about usage of this borrowed money?
What can you do with the borrowed money? it is locked in for margin purposes is it not? for the short BOX
Can somebody please give an example
Lets say a trader has 10K in account and wish to borrow another 30 K which in US won't be possible with traditional margin as it max 1:1
I use short boxes to leverage my long-term portfolio slightly. I can get a better (lower and fixed) interest rate this way as opposed to the higher and variable margin rate offered by IB. So I'm not trading, and I'm certainly nowhere near the 4x leverage from your example.

Speaking of interest rates, do you guys think the longer-term boxes (4, 5, 6, 7, 8 years) are worth the higher interest rate and theoretically higher mark-to-market risk due to lower liquidity? What is the sweet spot in terms of expiration?
I only do Boxes for the next 3 to 6 months. I’m not interested in betting on the change in interest rates so I prefer to get the cheapest rates possible.

I have boxes expire every month so my dividends and contributions can be easily used to pay off the boxes without placing orders to close them.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
hithere
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by hithere »

gougou wrote: Mon Feb 21, 2022 6:49 pm
hithere wrote: Mon Feb 21, 2022 7:47 am
tjo wrote: Sun Feb 20, 2022 6:57 pm I have a fundamental question it is about usage of this borrowed money?
What can you do with the borrowed money? it is locked in for margin purposes is it not? for the short BOX
Can somebody please give an example
Lets say a trader has 10K in account and wish to borrow another 30 K which in US won't be possible with traditional margin as it max 1:1
I use short boxes to leverage my long-term portfolio slightly. I can get a better (lower and fixed) interest rate this way as opposed to the higher and variable margin rate offered by IB. So I'm not trading, and I'm certainly nowhere near the 4x leverage from your example.

Speaking of interest rates, do you guys think the longer-term boxes (4, 5, 6, 7, 8 years) are worth the higher interest rate and theoretically higher mark-to-market risk due to lower liquidity? What is the sweet spot in terms of expiration?
I only do Boxes for the next 3 to 6 months. I’m not interested in betting on the change in interest rates so I prefer to get the cheapest rates possible.

I have boxes expire every month so my dividends and contributions can be easily used to pay off the boxes without placing orders to close them.
Thank you for your input. It sounds like you can easily deleverage in case interest rates become too high. I guess it all boils down to what you use the borrowed money for. For someone like me, who intends to remain leveraged for decades, wouldn't it be beneficial to go for very long-term boxes? It's a dilemma for me since on the one hand I would be paying a premium, but on the other I would be protected against high interest rates to a certain extent.
sharukh
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by sharukh »

hithere wrote: Tue Feb 22, 2022 2:59 am
gougou wrote: Mon Feb 21, 2022 6:49 pm
hithere wrote: Mon Feb 21, 2022 7:47 am
tjo wrote: Sun Feb 20, 2022 6:57 pm I have a fundamental question it is about usage of this borrowed money?
What can you do with the borrowed money? it is locked in for margin purposes is it not? for the short BOX
Can somebody please give an example
Lets say a trader has 10K in account and wish to borrow another 30 K which in US won't be possible with traditional margin as it max 1:1
I use short boxes to leverage my long-term portfolio slightly. I can get a better (lower and fixed) interest rate this way as opposed to the higher and variable margin rate offered by IB. So I'm not trading, and I'm certainly nowhere near the 4x leverage from your example.

Speaking of interest rates, do you guys think the longer-term boxes (4, 5, 6, 7, 8 years) are worth the higher interest rate and theoretically higher mark-to-market risk due to lower liquidity? What is the sweet spot in terms of expiration?
I only do Boxes for the next 3 to 6 months. I’m not interested in betting on the change in interest rates so I prefer to get the cheapest rates possible.

I have boxes expire every month so my dividends and contributions can be easily used to pay off the boxes without placing orders to close them.
Thank you for your input. It sounds like you can easily deleverage in case interest rates become too high. I guess it all boils down to what you use the borrowed money for. For someone like me, who intends to remain leveraged for decades, wouldn't it be beneficial to go for very long-term boxes? It's a dilemma for me since on the one hand I would be paying a premium, but on the other I would be protected against high interest rates to a certain extent.
Maybe diversify, half in short term, half in long
mansamusa
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by mansamusa »

A question for those who are experienced using box spreads as loans:

What is the optimal spread amount and strikes, given a desired loan size? e.g. desired loan size = $500,000 & trading cost is ~$1 per contract. Is it best to buy 5 sets of box spread contracts (20 options contracts) at a 1,000 point spread or 1 set (4 contracts) at a 5,000 point spread? should the strikes be the points nearest to the current SPX index price, e.g. $4,000 & $5,000 if SPX is $4,500? Or are there advantages to choosing strikes differently?
parval
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by parval »

mansamusa wrote: Fri Feb 25, 2022 2:40 pm A question for those who are experienced using box spreads as loans:

What is the optimal spread amount and strikes, given a desired loan size? e.g. desired loan size = $500,000 & trading cost is ~$1 per contract. Is it best to buy 5 sets of box spread contracts (20 options contracts) at a 1,000 point spread or 1 set (4 contracts) at a 5,000 point spread? should the strikes be the points nearest to the current SPX index price, e.g. $4,000 & $5,000 if SPX is $4,500? Or are there advantages to choosing strikes differently?
If you believe people in the market generally know what they're doing, then go w/ recently popular strikes:

https://www.boxtrades.com/
Freebee34
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by Freebee34 »

mansamusa wrote: Fri Feb 25, 2022 2:40 pm A question for those who are experienced using box spreads as loans:

What is the optimal spread amount and strikes, given a desired loan size? e.g. desired loan size = $500,000 & trading cost is ~$1 per contract. Is it best to buy 5 sets of box spread contracts (20 options contracts) at a 1,000 point spread or 1 set (4 contracts) at a 5,000 point spread? should the strikes be the points nearest to the current SPX index price, e.g. $4,000 & $5,000 if SPX is $4,500? Or are there advantages to choosing strikes differently?
Generally those closest to ATM have the most liquidity so the wider you go the less chance of getting filled. As far as symmetry goes, it all depends on supply and demand. In a bullish market your call spread will fill much better than the put spread and the reverse is true in a bear market. In a bullish market you'll want to sell more above the money while in a bearish market you might want to tilt lower. In SPX things are so competitive that you rarely get a better rate by changing the strikes. What happens is you get filled much quicker.
Freebee34
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by Freebee34 »

hithere wrote: Tue Feb 22, 2022 2:59 am
gougou wrote: Mon Feb 21, 2022 6:49 pm
hithere wrote: Mon Feb 21, 2022 7:47 am
tjo wrote: Sun Feb 20, 2022 6:57 pm I have a fundamental question it is about usage of this borrowed money?
What can you do with the borrowed money? it is locked in for margin purposes is it not? for the short BOX
Can somebody please give an example
Lets say a trader has 10K in account and wish to borrow another 30 K which in US won't be possible with traditional margin as it max 1:1
I use short boxes to leverage my long-term portfolio slightly. I can get a better (lower and fixed) interest rate this way as opposed to the higher and variable margin rate offered by IB. So I'm not trading, and I'm certainly nowhere near the 4x leverage from your example.

Speaking of interest rates, do you guys think the longer-term boxes (4, 5, 6, 7, 8 years) are worth the higher interest rate and theoretically higher mark-to-market risk due to lower liquidity? What is the sweet spot in terms of expiration?
I only do Boxes for the next 3 to 6 months. I’m not interested in betting on the change in interest rates so I prefer to get the cheapest rates possible.

I have boxes expire every month so my dividends and contributions can be easily used to pay off the boxes without placing orders to close them.
Thank you for your input. It sounds like you can easily deleverage in case interest rates become too high. I guess it all boils down to what you use the borrowed money for. For someone like me, who intends to remain leveraged for decades, wouldn't it be beneficial to go for very long-term boxes? It's a dilemma for me since on the one hand I would be paying a premium, but on the other I would be protected against high interest rates to a certain extent.
Generally when you are going that short you have to weigh the transaction costs (e.g. bid ask spread, exchange fees) and market risk vs the lower rate. During March 2020 I had a very hard time trying to fill until things stabilized after the fed intervention. By going to the short end of the curve you loose the ability to "wait" things out. I try to go as long as possible (usually 1-2 years) as the rates that I see for 2-3 months (maybe 15 bsp less) are not worth the slippage and chance that I'll have to roll at a bad time. I am using this for cheap portfolio leverage so if your goals are different you might take a dif approach.
thinkofanamefast
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by thinkofanamefast »

2 questions for you or anyone seeing this regarding the scary mentions of being automatically liquidated due to large market moves. I have portfolio margin at IB and TOS and would only do this on SPX (European):

1. EDIT This question I'm removing was regarding forced liquidation of a seemingly safe box spread, but I searched this long thread again and realize the only chance of being force liquidated is due to IB or TOS margin calling on other investments you may have used this box spread credit to finance. One guy was going to use the money to put in a 2x SPY long situation. A forced liquidation on a bunch of these would be scary, since I'd be using SPX and could result in millions of dollars at risk overnight.

2. A lot of people say this money has to stay available in your account and can't be used. Wouldn't a workaround be to do your leveraged trades margined to the hilt, and THEN do this box trade to pay down that margin loan in your account with the credit? So essentially you could use it for leverage? Or does that only apply to Reg t and not in a portfolio margin account where you don't need this workaround since you can use the money right away?
Last edited by thinkofanamefast on Mon Feb 28, 2022 5:30 am, edited 2 times in total.
comeinvest
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by comeinvest »

Freebee34 wrote: Sun Feb 27, 2022 8:38 am
hithere wrote: Tue Feb 22, 2022 2:59 am
gougou wrote: Mon Feb 21, 2022 6:49 pm
hithere wrote: Mon Feb 21, 2022 7:47 am
tjo wrote: Sun Feb 20, 2022 6:57 pm I have a fundamental question it is about usage of this borrowed money?
What can you do with the borrowed money? it is locked in for margin purposes is it not? for the short BOX
Can somebody please give an example
Lets say a trader has 10K in account and wish to borrow another 30 K which in US won't be possible with traditional margin as it max 1:1
I use short boxes to leverage my long-term portfolio slightly. I can get a better (lower and fixed) interest rate this way as opposed to the higher and variable margin rate offered by IB. So I'm not trading, and I'm certainly nowhere near the 4x leverage from your example.

Speaking of interest rates, do you guys think the longer-term boxes (4, 5, 6, 7, 8 years) are worth the higher interest rate and theoretically higher mark-to-market risk due to lower liquidity? What is the sweet spot in terms of expiration?
I only do Boxes for the next 3 to 6 months. I’m not interested in betting on the change in interest rates so I prefer to get the cheapest rates possible.

I have boxes expire every month so my dividends and contributions can be easily used to pay off the boxes without placing orders to close them.
Thank you for your input. It sounds like you can easily deleverage in case interest rates become too high. I guess it all boils down to what you use the borrowed money for. For someone like me, who intends to remain leveraged for decades, wouldn't it be beneficial to go for very long-term boxes? It's a dilemma for me since on the one hand I would be paying a premium, but on the other I would be protected against high interest rates to a certain extent.
Generally when you are going that short you have to weigh the transaction costs (e.g. bid ask spread, exchange fees) and market risk vs the lower rate. During March 2020 I had a very hard time trying to fill until things stabilized after the fed intervention. By going to the short end of the curve you loose the ability to "wait" things out. I try to go as long as possible (usually 1-2 years) as the rates that I see for 2-3 months (maybe 15 bsp less) are not worth the slippage and chance that I'll have to roll at a bad time. I am using this for cheap portfolio leverage so if your goals are different you might take a dif approach.
I hear what you are saying, but I'm not sure.
- "You loose the ability to wait things out" - true, but with 3 month spreads you would "overpay" interest for 3 months, while with 6 month spreads you would "overpay" interest for 6 months, albeit less often. Unless you can time the market, that might be a wash. Or you can try to time the market, of course.
- Slippage (bid ask spread) might be higher for longer box durations (maybe proportional to the box length?). So it might be a wash in terms of total slippage cost per time. (to do: verify slippage cost depending on box maturity length)
- Exchange fees are negligible unless you have a very small account.
- Eyeballing the 12 months vs 3 months chart, you would "overpay" about 0.25% during the last decade during the zero interest rate policy, but about 0.75% in prior decades, if you use 12 months financing vs 3 months financing.
- You are also subject to interest rate shocks on your 12-months box from decreasing rates that are positively correlated to your equities portfolio during macroeconomic shocks (because the 12 months box has about 4 times the duration as a 3 months box, and if you sell a box you have negative duration exposure).

Image

There seems to be even a small, but measurable difference of average financing cost between 3-month an 6-month financing, my estimate eyeballing the chart of the last 1-2 decades would be between 0.05% - 0.1% (probably mostly depending on the overall interest rate level, as the Fed has avoided negative rates yet). Compare to additional commission of say twice a year of $6 for a $100k box -> 12 / 100,000 = 0.012%.

Image
Last edited by comeinvest on Sun Feb 27, 2022 10:26 pm, edited 6 times in total.
comeinvest
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by comeinvest »

Freebee34 wrote: Sun Feb 27, 2022 8:26 am
mansamusa wrote: Fri Feb 25, 2022 2:40 pm A question for those who are experienced using box spreads as loans:

What is the optimal spread amount and strikes, given a desired loan size? e.g. desired loan size = $500,000 & trading cost is ~$1 per contract. Is it best to buy 5 sets of box spread contracts (20 options contracts) at a 1,000 point spread or 1 set (4 contracts) at a 5,000 point spread? should the strikes be the points nearest to the current SPX index price, e.g. $4,000 & $5,000 if SPX is $4,500? Or are there advantages to choosing strikes differently?
Generally those closest to ATM have the most liquidity so the wider you go the less chance of getting filled. As far as symmetry goes, it all depends on supply and demand. In a bullish market your call spread will fill much better than the put spread and the reverse is true in a bear market. In a bullish market you'll want to sell more above the money while in a bearish market you might want to tilt lower. In SPX things are so competitive that you rarely get a better rate by changing the strikes. What happens is you get filled much quicker.
"Generally those closest to ATM have the most liquidity so the wider you go the less chance of getting filled" - Let's not forget that we are trading natively exchange-traded boxes here, that have an order book separate from the regular options order book. So liquidity of the options legs that are part of the box spread probably matters little. It has been widely reported in this thread, and it is my own experience, that the effective interest rates that can be achieved with box trades are very similar whether you use round numbers (4000, 5000, etc.) as strike prices, or odd numbers. It has also been widely reported that very wide spreads with strike prices that actually have no bid/ask quotes at all for the individual legs, get similarly good fills. There is a conjecture that round numbers sometimes get "better" fills, perhaps as retail orders get matched directly bypassing the market maker or market markers can balance their books better with round strike numbers, but these are just conjectures as far as I know, as I have not seen conclusive evidence yet. Please let me know if you have evidence that I'm not aware of.
impatientInv
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Re: Box Spreads as Loans - Interactive Brokers IBKR - 2021

Post by impatientInv »

Without portfolio margin at IBKR, how is the comparison of IBKR and Schwab for margin? (assuming using box spreads)
Last edited by impatientInv on Mon Mar 14, 2022 7:51 pm, edited 1 time in total.
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