How do you practically trade box spreads?

[MrMuppet]

Cheaper from an execution perspective?

Exactly. ITMs have wide bid/offer spreads while OTMs are tight. So you neutralize the position with an opposing vertical and sit on the box till expiration.

Just FYI there are a lot of trades you can do when the risk free rate wakes up like it is now, e.g. renting calls or puts by trading the combo at even when the price of the option is lower than the cost of carry (interest rate you pay on your margin). These work best in FOPs because there is no asignment and you can trade the underlying.

I would look to trade these actively instead of trying to execute a box. Speaking of it, the biggest risk of your strategy is execution risk. If you send an order at midpoint you won't get a fill so you'd have to leg it. If you're off a couple of cents you completely ruin your return while at the same time you'll sit on your position for half a year.

 

[newwurldmn]

Did not put position on yet. About 4 percent on bonds. Assuming I can get 4 percent from box.

How do you get 8% with bonds yielding 4% and the box implying 4%?

 

[Gambit]

How do you get 8% with bonds yielding 4% and the box implying 4%?

I meant stacking one on top of another. Bonds are collateral. And then put on a long box spread. Two separate positions.

 

[newwurldmn]

I meant stacking one on top of another. Bonds are collateral. And then put on a long box spread. Two separate positions.

Can you draw a cashflow diagram to show how you would do it?

 

[Gambit]

I could but I feel I am not communicating clearly. I am not in the industry so my terminology may be incorrect/confusing. If @Robert Morse could jump in kindly, that may help.

 

[Gambit]

Here is how I set up my account. I asked my broker to purchase one year treasuries on treasury direct.
They were deposited in my account. Those bonds are now my margin collateral but there is a haircut and only 95 percent of the bond value can be used as margin.
Now let’s say I have 95 k which is considered cash. I could buy a box with that 95 k and assuming my execution price is good, I collect interest.
So I stacked my returns with a box spread on top of treasuries.

 

[blueraincap]

Wtf are you talking about?
How do you buy a bond in the first place to fund the debit box? Your account will be negative in cash

 

[newwurldmn]

Wtf are you talking about?
How do you buy a bond in the first place to fund the debit box? Your account will be negative in cash

That's what i'm trying to get him to see.

 

[blueraincap]

That's what i'm trying to get him to see.

He must be some time-wasting idiot.

I have yet to understand how I should manage my monthly positive cash balance.
- leaving cash in IBKR is obviously easiest but not optimal
- box bid-ask a wee too high to receive market rate, after commission will be worse than IBKR cash rate
- T-bill fine, but still the bid-ask and commission will eat away a meaningful amount since I need to adjust/roll every month
- Bond ETF is not for cash mgmt and will subject me to unwanted duration risks
- I think I will likely suck up the expense fees and buy money-market ETFs for 1month+ cash balances such as BIL, GBIL, HSUV (Canada), SHV, SGOV, but that will negatively impact margin

 

[blueraincap]

• BIL: 10% margin, 0.14% exp
• GBIL: 10% margin, 0.14% exp
• SHV: 10% margin, 0.15% exp
• SGOV: 27.5% margin, 0.05% exp
• HSUV: 30% margin, 0.18% exp