Selling SPX box for financing

[FSU]

The proceeds don't add to your equity but to cash balance so you can use this cash for positions on margin instead of borrowing it from your broker.

Exactly.

Say you have $100,000 in your account. You put a spread on where you buy $200,000 worth of stock and deep puts to protect the position. You may have minimal risk margin, but you will be borrowing $100,000 extra from your broker to finance the position. If you sell $100,000 worth of boxes, you will no longer need to borrow this extra money from the broker.

 

[Robert Morse]

Exactly.

Say you have $100,000 in your account. You put a spread on where you buy $200,000 worth of stock and deep puts to protect the position. You may have minimal risk margin, but you will be borrowing $100,000 extra from your broker to finance the position. If you sell $100,000 worth of boxes, you will no longer need to borrow this extra money from the broker.

This is all correct. All long stock, long options & short options all go into the type 2 margin account. The cash from all is netted out to determine if you need to borrow funds from your clearing house. Short stock goes into account the type 3 account so shorts do not offer any offset to other accounts. For those interested, Type 1 is for a cash account.

 

[FSU]

This is all correct. All long stock, long options & short options all go into the type 2 margin account. The cash from all is netted out to determine if you need to borrow funds from your clearing house. Short stock goes into account the type 3 account so shorts do not offer any offset to other accounts. For those interested, Type 1 is for a cash account.

Bob, I remember way back the market maker clearing firms hated this as they made a substantial amount of profit on the overall debit /credit spread on their customers accounts. Is this the case with brokers today? Would Wedbush, IB or any of the others notice or care?

 

[Robert Morse]

FSU,

When I was a market maker, we shared the interest on credit balances from both options and ETB short stocks with the clearing firm. SLK/GSEC loved the credit balances I as a MM created and were happy to share. Without us, there was no interest to share.

With regard to a customer relationship that avoids borrowing money with credit spreads, I have heard no complaints. I just can't imagine a MM buying a 1000 or 500 point box at the same price where both side can make money. And the marks from the 4 legs can get nasty and even cause a margin call in a PMA that needs to be meet next day.

 

[raf_bcn]

Hi

I have reviewed this thread as from another related thread started by @FSU
https://www.elitetrader.com/et/threads/selling-spx-boxes-for-interest.319832/

Well I don't have a Portfolio margin account, but it seems that the margin for selling boxes is very low. If I sell a SPX 3,000 point box I will receive 298,705.00 in cash.
And the margin is about 320.00 Is that margin possible? I am doing this with the IB Risk navigator .

It seems an easy way to never again have a margin call or at least a way to restore the margin compliance quickly .
An excess liquidity of -100,000.00 no problem, I sell 1 box. Or I am missing something?

But there is one comentary that boders me and is from @RobertMorse, so it has to be seriously considered.

And the marks from the 4 legs can get nasty and even cause a margin call in a PMA that needs to be meet next day.

It is possible that, in a special market situation, the margin required for a short box in a PM account increases as much to have a margin call from the short box?
I don't understand How a margin can increase from 320.00 to 300,000.00
I apologize if I have misunderstood what mr Morse is saying here.

 

[destriero]

One PB I used charged a multiple of Rho on the position. IKBR once forced me out of a portion of a box in a retail account but they covered the loss.

FSU,

When I was a market maker, we shared the interest on credit balances from both options and ETB short stocks with the clearing firm. SLK/GSEC loved the credit balances I as a MM created and were happy to share. Without us, there was no interest to share.

With regard to a customer relationship that avoids borrowing money with credit spreads, I have heard no complaints. I just can't imagine a MM buying a 1000 or 500 point box at the same price where both side can make money. And the marks from the 4 legs can get nasty and even cause a margin call in a PMA that needs to be meet next day.

To OP: the req should be the risk if you’re trading an outlook on rates (not an arb).

 

[elt894]

It seems an easy way to never again have a margin call or at least a way to restore the margin compliance quickly .
An excess liquidity of -100,000.00 no problem, I sell 1 box. Or I am missing something?

It won't help to avoid a margin call. A margin call occurs when your margin exceeds your net value (Equity with Loan Value). Selling a box spread won't change your net value, and will slightly increase your margin (I'm not sure how large the effect is in a RegT account). The purpose of selling a box would be to borrow cash from the market rather than your broker to possibly get a better rate.

It is possible that, in a special market situation, the margin required for a short box in a PM account increases as much to have a margin call from the short box?

The risk isn't that IB will change the margin requirement, although that is possible as well. Each leg of the box is marked independently, and since the spreads could be quite wide it's possible that the sum of the parts will be quite far from the fair value of the box spread. Suppose you sell a 1000 point box for 990. If it gets marked at 1050 you'd have a paper loss of $6000. The danger is if that puts your over your margin limit. I personally don't have a good feel for how big of a deviation you might expect.

 

[Sig]

It won't help to avoid a margin call. A margin call occurs when your margin exceeds your net value (Equity with Loan Value). Selling a box spread won't change your net value, and will slightly increase your margin (I'm not sure how large the effect is in a RegT account). The purpose of selling a box would be to borrow cash from the market rather than your broker to possibly get a better rate.



The risk isn't that IB will change the margin requirement, although that is possible as well. Each leg of the box is marked independently, and since the spreads could be quite wide it's possible that the sum of the parts will be quite far from the fair value of the box spread. Suppose you sell a 1000 point box for 990. If it gets marked at 1050 you'd have a paper loss of $6000. The danger is if that puts your over your margin limit. I personally don't have a good feel for how big of a deviation you might expect.

You can use a bit of jujitsu to trick the IB Algorithm by exploiting the same idiocy that results in the spurious margin call/auto-liquidation. Simply putting in the same order as a 1 contract GTC at a position it would't be filled, i.e. something like $950 in your case. That will always show up on the COB that The Algorithm is using to determine the value of the spread and it's too stupid to realize the quote is coming from your account and isn't "real" from a risk perspective, just like it's too stupid to realize that a paper loss due to big spreads in a riskless position isn't "real" from a risk perspective.

 

[raf_bcn]

Hi

A margin call occurs when your margin exceeds your net value (Equity with Loan Value).

A margin call occurs when the margin exceeds the Equity with Loan Value, but the ELV is not the same as the Net liquidation value.
If you sell a box, the cash that you received goes to the ELV but the value of the options doesn't, if they are american . And that difference makes your account have
an Excess liquidity, which you can use to margin other positions. I am correct ?

Equity with loan = cash value + stock value +bond + fund + european and asian options.
Excess liquidity = ELV - margin

Each leg of the box is marked independently, and since the spreads could be quite wide it's possible that the sum of the parts will be quite far from the fair value of the box spread.

Thanks , that was what I wanted to confirm.
But, following your example, if the mark to market value of the box changes momentarily, that wouldn't change the margin required, or maybe yes, but not from 300.00 to 300,000.00 . Remember We have a big exccess liquidity from that box.
If a SPX 1000 points box goes to 1050, that will be arbitradged very quickly, doesn't ? and return to a fair value.

And more, if it's a box with european style options, no early assignment risk, the broker knows exactly what you are going to lose at expiration day, so would not be fair to early autoliquidate that box for a biger loss. Someone has found in a similar situation ?

Thank you for your comments.

 

[Sig]

Hi



A margin call occurs when the margin exceeds the Equity with Loan Value, but the ELV is not the same as the Net liquidation value.
If you sell a box, the cash that you received goes to the ELV but the value of the options doesn't, if they are american . And that difference makes your account have
an Excess liquidity, which you can use to margin other positions. I am correct ?

Equity with loan = cash value + stock value +bond + fund + european and asian options.
Excess liquidity = ELV - margin



Thanks , that was what I wanted to confirm.
But, following your example, if the mark to market value of the box changes momentarily, that wouldn't change the margin required, or maybe yes, but not from 300.00 to 300,000.00 . Remember We have a big exccess liquidity from that box.
If a SPX 1000 points box goes to 1050, that will be arbitradged very quickly, doesn't ? and return to a fair value.

And more, if it's a box with american style options, no early assignment risk, the broker knows exactly what you are going to lose at expiration day, so would not be fair to early autoliquidate that box for a biger loss. Someone has found in a similar situation ?

Thank you for your comments.

Note that SPX options are European cash settled options, so no early assignment risk of any leg.

The problem isn't that the actual value of the box goes out of whack, as you mentioned that would be arb'd away quickly. The problem is that if you have wide bid/ask spreads The Algorithm at IB uses the bid or ask, on the side worst for you, to determine the "value", even if that has no bearing on the actual risk of the position. So you have to trick The Algorithm at it's own game by putting in a GTC box order that keeps the half of the spread you care about close to the actual final liquidation value of the box.