gougou wrote: ↑Sat Jun 11, 2022 9:46 pm
calwatch wrote: ↑Sat Jun 11, 2022 8:48 pm
gougou wrote: ↑Sat Jun 11, 2022 1:33 pm
If the brokerage you use go under, are your box spreads safe?
They are guaranteed by the Options Clearing Corporation. They have a page about this here:
https://www.optionseducation.org/refere ... -cash.aspx
As far as choosing this over Interactive Brokers, note that these rates are fixed for the time you choose. IBKR's margin rates will go up as the Fed fund rates and other risk free rates continue to increase. You also have to deal with IBKR's interface which may not be for you. I can get good rates for margining using my normal brokerage, Ameritrade, through the use of box spreads.
I’m trying to understand if there are any risks with long SPX boxes. Why does it yield higher than Treasuries? Is it because there’s some risk that I don’t know about. Or maybe the holder of Treasuries can lend out Treasuries for some extra return?
I am not knowledgable enough to answer your question, but here are some thoughts:
- I think I read somewhere that some institutions (banks?) are subject to regulations on maximum leverage on their balance sheets, that may or may nor reflect the "real" risk. (Laws and regulations rarely make sense rationally, do they?) As a result, there might be "competition" for available financing at rates close to T-bill rates due to a limited pool of counterparties.
I'm not sure if that can explain what appears to be a risk-free arbitrage opportunity for unconstrained investors. (How could one implement the arbitrage? Long the box short the T-bill certainly doesn't work for retail investors due to the technicalities of the cost of shorting; I'm not sure if it would work for institutional investors.)
- Investors prefer liquid over illiquid investments everything else being equal, i.e. investors accept lower yields if they can dump the securities faster during a crash. I'm not sure if you can dump treasuries faster then options, I'm not sure if there is any reason for any market participant or counterparty to dump options boxes even when the underlying index crashes, or perhaps when the money market shows dislocations; and I'm not sure if any of this is a factor impacting options box yields.
As I said, I don't claim these ideas to be conclusive at explaining your question. I'm also not sure if the nature of the underlying (the equity index in this case) plays a role or not. (I think it shouldn't, as the index value is not an input to the valuation of an options box.) But I think boxes of some commodity futures options have lower implied yields than SPX boxes at least since the time when I started monitoring them, which is surprising to me.