box spreads versus exchange traded financing

[MrMuppet]

By doing a combo in a hard to borrow stock, you will essentially get the full short rate instead of sharing it with IB. The short rate is "written in" the price of the options.

So instead of being long stock, you would be long calls and short puts of the same strike. You would want to pick farther out of the money strikes, as in the money ones would have calls that "should" be exercised.

careful here, I've done that quite a lot to arb borrowing rates and got occasionally burned.

If the stock gets halted, the options are halted as well but the right to exercise remains intact.
So if you are long the combo and the stock is in for a halt...let's say because of a fraud investigation...you are in really deep trouble. The other guy exercises the put and you're sitting on a fat long position you cannot get out of. Not that it cannot happen in other situation but hefty borrowing rates are there for a reason when a single name goes bonkers and more often than not the American style exercise bites your ass.

Very nuanced play that requires a good backdoor plan in case things go tits up if you do things naked.

 

[FSU]

careful here, I've done that quite a lot to arb borrowing rates and got occasionally burned.

If the stock gets halted, the options are halted as well but the right to exercise remains intact.
So if you are long the combo and the stock is in for a halt...let's say because of a fraud investigation...you are in really deep trouble. The other guy exercises the put and you're sitting on a fat long position you cannot get out of. Not that it cannot happen in other situation but hefty borrowing rates are there for a reason when a single name goes bonkers and more often than not the American style exercise bites your ass.

Very nuanced play that requires a good backdoor plan in case things go tits up if you do things naked.

I don't agree with you here. Doing the combo in this situation would reduce your risk, not increase it. If you are assigned on your short put, you will get long stock. This would put you in the exact position you would have had if you bought stock vs doing the combo.

You also would have the possibility of not being assigned on your short put even if deep in the money on expiration. This is what happened in the halted Russian ETF's. Some people who were long puts were blocked from exercising them by their brokers as the brokers didn't want them short stock. This allowed some people to skate on being assigned on their short in the money puts.

 

[MrMuppet]

I don't agree with you here. Doing the combo in this situation would reduce your risk, not increase it. If you are assigned on your short put, you will get long stock. This would put you in the exact position you would have had if you bought stock vs doing the combo.

You also would have the possibility of not being assigned on your short put even if deep in the money on expiration. This is what happened in the halted Russian ETF's. Some people who were long puts were blocked from exercising them by their brokers as the brokers didn't want them short stock. This allowed some people to skate on being assigned on their short in the money puts.

Not quite. It all depends on the timing of the exercise and the synthetic forward. If you are long the combo at 8% synthetic borrowing rate and the rate increases to 80% you're pretty fked. An early exercise would be nice in that situation because you can cash in the discount right away...

But that only happens when the put goes ITM...but you're long...well shit.

So the play here is either you pick the bottom on the synthetic rate and/or are right on direction or you get either direction or synthetic rate wrong and you're getting your scull cracked.


So if you come from a risk parity point of view, yes, you're correct if the carry received outweights transaction costs. But to do that you have to lock in the arb...which is where exercise shenanigans can bite your ass.

If you trade the combo outright, you basically add additional risk to your position

 

[newwurldmn]

"How would they handle the counterparty risk and collateral?"

The same way they do it when you use box spreads.

the box is really a bet on interest rates using a zero coupon bond.

it works this way because both counter parties are almost AAA (your broker backing your position with the OCC and the OCC itself). The price is dictated by the largest players who can fund at the lowest rates.

Your margin rates are higher because you are captive to the broker. No broker will open that up to another party. And no other party would want to finance your risk with no control over your account. The box liability prevents you from withdrawing the cash. The broker’s margin agreement with you controls the cash.

Other arrangements exist but you have to be private bank/prime broker rich for a lender engage with you.

 

[ScroogeMcDuck]

I'm just proposing the OCC create some Schelling point to aggregate all the people who want to trade box spreads into a more liquid market. I don't care whether what is being traded is still technically a European box spread. Presently the action is spread across too many different strikes, dates, and tickers so it's much less liquid than it could be.

 

[adamhg]

I'm just proposing the OCC create some Schelling point to aggregate all the people who want to trade box spreads into a more liquid market. I don't care whether what is being traded is still technically a European box spread. Presently the action is spread across too many different strikes, dates, and tickers so it's much less liquid than it could be.

I run the boxtrades.com site and a few people alerted me to this thread.

I’ve personally had the exact same problem with transparency of the complex option order book. I was able to find a p2p box spread counterparty on another forum, and am planning to add the ability to let retail traders post their open box spread orders. That way you can do exactly what you’re suggesting and spread us to trade box spreads p2p

 

[FSU]

I run the boxtrades.com site and a few people alerted me to this thread.

I’ve personally had the exact same problem with transparency of the complex option order book. I was able to find a p2p box spread counterparty on another forum, and am planning to add the ability to let retail traders post their open box spread orders. That way you can do exactly what you’re suggesting and spread us to trade box spreads p2p

Great site, very impressive. I have been checking it regularly.

I assume you are scrapping time and sales for the information.

If you are planning to allow retail traders the ability to post their box spreads, you may want to simply scrape information from the COB and post all standing box bid/offers and their implied rate. This way you would have all boxes posted, not just the ones traders post on their own. Since SPX is single listed, you would only need access to the CBOE COB. The only issue would be if the CBOE had a problem with you posting this information.

 

[MrMuppet]

I'm just proposing the OCC create some Schelling point to aggregate all the people who want to trade box spreads into a more liquid market. I don't care whether what is being traded is still technically a European box spread. Presently the action is spread across too many different strikes, dates, and tickers so it's much less liquid than it could be.

I don'T really know but didn't TOS already have that feature? A P2P spread book, I mean? I never traded via TOS but somehow I remember reading about that feature. On the other hand, you can always use RFQ if your broker is decent and you have access to directly trade against a wholesaler

 

[ScroogeMcDuck]

On IBKR TWS is there any way to view the order book for box spreads over all strike combos on a particular date?

 

[adamhg]

Great site, very impressive. I have been checking it regularly.

I assume you are scrapping time and sales for the information.

If you are planning to allow retail traders the ability to post their box spreads, you may want to simply scrape information from the COB and post all standing box bid/offers and their implied rate. This way you would have all boxes posted, not just the ones traders post on their own. Since SPX is single listed, you would only need access to the CBOE COB. The only issue would be if the CBOE had a problem with you posting this information.

Thanks! The data comes from a data provider and yes, I'm matching up boxes by t&s.

I'd love to display the actual COB bid/ask, but unfortunately I don't have access to it. If anybody does, I'd be happy to see how we can make it available. If we could display the actual COB, then people wouldn't need to even post their own trades separately since everything would be on the exchange anyways.