Financing: how to sell boxes properly?

[STaRGaZeR]

Hi guys, first a little bit of explaining.

I'm with IB. I have a margin account. My account's base currency is EUR, and also virtually all of my money is in EUR. But my main activities involve selling USD denominated options. I don't have any money in USD other than the result of my PnL. I periodically convert this USD profit to EUR, so at any given point in time there are no more than a few thousand USD in my account, the rest is in EUR.

Everything is fine and working, but there's this "Accrued interest" row in the Account details window. This value decreases every 2 or 3 days, I haven't found a concrete pattern. Since my account's base currency is EUR, this row is reported also in EUR. So for example, today I see -10EUR, 2 days later I might see -20EUR, and so on. The value seems to reset on weekends.

The first question I want to ask you guys is about the origin of this negative (to be paid by me) accrued interest. My current understading is that this interest comes from the USD that IB is lending me to cover the margin requirements of my option selling operations. Since I have (virtually) no USD balance, when I go and sell and option that requires 20K USD in margin, IB lends me this USD amount even though I have enough EUR to cover this margin. Then they charge me interests on this USD loan. Am I right?

Assuming that I'm correct, then I want to avoid this interest if possible. Right now the USD lending rate at IB is 2.66% if I'm seeing it right, which is a lot. I was looking at ways to have a positive USD position in my accound so that when I open a position requiring margin in USD, that margin is covered by this positive USD balance.

So, how to achieve this positive USD balance? I see 2 options. The first one is easy, just convert my EUR balance to USD balance. But this leaves me open to currency value variations. The second one I found, but I have little information about the proper way of doing it, is selling a box for financing purposes. What option do you think it's best to pay the least amount of money for the USD loan?

Assuming I go with the box selling, what is the best way of doing this? SPX, ES options? Which strikes are more liquid for this purpose? Expiration? Are american options an option, or just european to avoid assigment risk? I was thinking about going with ES options because of SPAN margin. Basically a box expiring in december using ES options requires 0 margin when I simulated it yesterday. Simulating the same box using SPX options required around 8K USD in margin.

Any help is appreciated!

 

[Robert Morse]

Selling the box wil create another margin requirement.

 

[STaRGaZeR]

Selling the box wil create another margin requirement.

As I say in my post, I tried selling an ES box and the margin requirement was 0. It was 8K when I tried an SPX box though.

0 margin makes sense to me, as I cannot lose any money and ES options use the SPAN margin system.

 

[JackRab]

Is IB holding the margin in USD for you selling options? Because that would mean they basically lend you the margin amount in USD and charge interest on that. That would make sense to me...

Maybe @Robert Morse knows better... does margin need to be held in the currency it's traded in?

 

[JackRab]

As I say in my post, I tried selling an ES box and the margin requirement was 0. It was 8K when I tried an SPX box though.

0 margin makes sense to me, as I cannot lose any money and ES options use the SPAN margin system.

I think the margin amount would be the size of the box... so if you would sell a box worht 10k, than that would be the margin as well, since at expiry you need to buy back the box...

Although, I think it would depend on how the options settle... is it's marked-to-market daily settlement you don't actually receive anything at initial sale, so you would use less margin... And in this case, it would be pointless to sell a box anyway since you don't get any money to 'finance'.

I think you should forget about selling boxes... it's expensive anyway in fees and to get it traded you would trade it at a crappy price anyway I think.

Just hold some USD for margin requirments. How much is your avg margin?

 

[DeltaRisk]

As a financing vehicle the rates are much the same as a prime mortgage in the states.

But remember, brokers are allowed to ask for more margin anytime.

 

[STaRGaZeR]

Is IB holding the margin in USD for you selling options? Because that would mean they basically lend you the margin amount in USD and charge interest on that. That would make sense to me...

Maybe @Robert Morse knows better... does margin need to be held in the currency it's traded in?

This is my first question actually, I'm pretty confident the origin of the interest is that USD loan, but I'm not 100% sure. Maybe a talk with IB is in order.

I think the margin amount would be the size of the box... so if you would sell a box worht 10k, than that would be the margin as well, since at expiry you need to buy back the box...

Although, I think it would depend on how the options settle... is it's marked-to-market daily settlement you don't actually receive anything at initial sale, so you would use less margin... And in this case, it would be pointless to sell a box anyway since you don't get any money to 'finance'.

I think you should forget about selling boxes... it's expensive anyway in fees and to get it traded you would trade it at a crappy price anyway I think.

Just hold some USD for margin requirements. How much is your avg margin?

When selling the box I expect to hold it till expiration, so no buy back. My idea is to buy every year a single december box that covers my margin requirements so that the commissions are as low as possible. That's why I asked if any of you guys knew any "special" set of strike/expiration combinations that are normally used by box sellers/buyers, with better liquidity and tighter spreads. I saw this reddit thread which provides some insight on the subject, but it's not clear to me which is the best way of achieving what I want, or if it even makes sense to do it: https://www.reddit.com/r/options/comments/3qorue/best_options_for_trading_box_spreads/

When for example I sell an ES option for 100 (5000USD notional), I inmediately see a positive 5000USD balance in my account. After selling the box, let's say, for 50K USD, I'd see a positive 50K USD balance which in turn would be used to cover the USD margin. And the "interest" I'd pay would be only the difference between the strike prices of the box and the money I actually received for selling the box plus commission fees.

Average margin is never more than 50K.

As a financing vehicle the rates are much the same as a prime mortgage in the states.

But remember, brokers are allowed to ask for more margin anytime.

Thanks, can you give some info about which strikes/expirations/option series are usually used for boxes?

 

[JackRab]

When selling the box I expect to hold it till expiration, so no buy back. My idea is to buy every year a single december box that covers my margin requirements so that the commissions are as low as possible. That's why I asked if any of you guys knew any "special" set of strike/expiration combinations that are normally used by box sellers/buyers, with better liquidity and tighter spreads. I saw this reddit thread which provides some insight on the subject, but it's not clear to me which is the best way of achieving what I want, or if it even makes sense to do it: https://www.reddit.com/r/options/comments/3qorue/best_options_for_trading_box_spreads/

When for example I sell an ES option for 100 (5000USD notional), I inmediately see a positive 5000USD balance in my account. After selling the box, let's say, for 50K USD, I'd see a positive 50K USD balance which in turn would be used to cover the USD margin. And the "interest" I'd pay would be only the difference between the strike prices of the box and the money I actually received for selling the box plus commission fees.

How much of the 50k you get from selling the box goes to margin reqs for the short box? Because I'm inclined to think that it will be all of it... and then you're not getting anything really...
Buy buying back I meant at exiration... at that time you need the full amount of the box to cover, and therefore the box margin might be the full amount....

 

[STaRGaZeR]

How much of the 50k you get from selling the box goes to margin reqs for the short box? Because I'm inclined to think that it will be all of it... and then you're not getting anything really...
Buy buying back I meant at exiration... at that time you need the full amount of the box to cover, and therefore the box margin might be the full amount....

The only point of the box is to avoid paying 2.66% on USD loans and instead get the money to cover the USD margin from the box selling, which I assume can provide the same amount of money but at a much lower interest rate. I'll still be paying interests, but less.

Let's assume I sell the box for 50K. Now I have a positive USD balance of 50K. Let's also assume that the box is done using ES options, so the margin usage is 0 at this point.

Next I sell some options that require 50K in margin. Since I have +50K USD in my account from the box selling, this amount covers the USD margin requirements of the sold options. IB doesn't lend me any money since I have enough. IB charges me no interest because there is no loan.

Now let's assume that the box and the sold options expire on the same day for an easy example. The sold options expire at a profit or loss, doesn't matter, let's assume a profit of 5K USD. Now my margin usage is back at 0 and my USD balance is 50K (box) + 5K (profit). At the same time the box expires, and I have to return the money (50K) to the box seller. I'm now margin = 0 USD, USD balance = 5K.

I was able to complete my option selling operations without paying IB any money in USD loan interests. The only thing I payed was the implicit interest in the selling of the box, because I didn't actually receive 50K, but for example 49.5K (assuming an implicit rate of 1%). If on the other hand I went with the IB loan, I'd have paid 2.66%, or 1330 USD. The final result is that I just avoided having to pay 1330 - 500 = 830 USD to IB.

Am I right or completely out of my mind?

 

[JackRab]

Am I right or completely out of my mind?

No looks good to me

But you do have portfolio margin account correct? Because otherwise the whole 50k would be going to margin for the box itself.

Also, make sure you do this with the correct options. Because with some options on futures, there's actually no money debited/credited when doing the trade. Instead those are based on marked-to-market and you pay the difference on a daily basis (just like futures). That would mean this idea wouldn't work...