I'm not understanding anything, not any one half sentence, of what you are saying in this or your previous comment. If you are questioning the motive, please rest assured that I and many others desire to leverage their portfolio at low rates via box spreads. Likewise, many counterparties also desire to earn interest with spare cash. That's by definition what makes the money market, and by implication the market of box spreads. I asked some very precise questions regarding the mechanics of options box spreads. Please let me know if you have any advise regarding my questions. Thanks.
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Selling SPX box for financing
- Thread starter alexpun
- Start date
I'm not understanding anything, not any one half sentence, of what you are saying in this or your previous comment. If you are questioning the motive, please rest assured that I and many others desire to leverage their portfolio at low rates via box spreads. Likewise, many counterparties also desire to earn interest with spare cash. That's by definition what makes the money market, and by implication the market of box spreads. I asked some very precise questions regarding the mechanics of options box spreads. Please let me know if you have any advise regarding my questions. Thanks.
I misunderstood. I thought you were trying to trade the box on both sides (like a market maker).
I understand the motivation to trade a box. I have 10mm of my portfolio funded through them right now.
but I don’t understand why you think you will get a better price by interacting with the combo order book. Spx boxes are pretty liquid. You don’t have to cross bud offer to trade. Put in a order like 1 or 2 points from mid and you will probably get filled.
how confident are you that you couldn’t buy your box for zero. That would be an aribitrage for your counterparty.
I understand the motivation to trade a box. I have 10mm of my portfolio funded through them right now.
but I don’t understand why you think you will get a better price by interacting with the combo order book. Spx boxes are pretty liquid. You don’t have to cross bud offer to trade. Put in a order like 1 or 2 points from mid and you will probably get filled.
how confident are you that you couldn’t buy your box for zero. That would be an aribitrage for your counterparty.
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I think he thinks there's a 50 bp spread on the buy and sell from MM and he's assuming that somewhere among all the possible combinations of boxes there are resting orders from non MM that are closer to the mid. The problem being that unlike a single stock where you can just put your own limit order in, there are so many combinations with SPX boxes that it's difficult to find the couple of resting orders out there.I misunderstood. I thought you were trying to trade the box on both sides (like a market maker).
I understand the motivation to trade a box. I have 10mm of my portfolio funded through them right now.
but I don’t understand why you think you will get a better price by interacting with the combo order book. Spx boxes are pretty liquid. You don’t have to cross bud offer to trade. Put in a order like 1 or 2 points from mid and you will probably get filled.
how confident are you that you couldn’t buy your box for zero. That would be an aribitrage for your counterparty.
I think he thinks there's a 50 bp spread on the buy and sell from MM and he's assuming that somewhere among all the possible combinations of boxes there are resting orders from non MM that are closer to the mid. The problem being that unlike a single stock where you can just put your own limit order in, there are so many combinations with SPX boxes that it's difficult to find the couple of resting orders out there.
Exactly! You exactly re-phrased my concern and my question. If I could view the order book, I think that problem would be largely eliminated, as not viewing the order book puts me at a significant informational disadvantage to the market makers. I believe there is no logical reason why in this age of free flow of information, a market maker should be "entitled" to capture a 0.5%+ spread on near-riskless box spreads, and orders tighter than this within this spread will not get filled because the book is "hidden" from retail investors who will not find opposing orders that they might otherwise want to trade against.
I'm not a pro trader, but does anyone know why CBOE discontinued the COB on the web? Possibly some "deal" between the exchange and the marker maker community i.e. "the big guys" to retain a profit center, at a time when commissions and profits from making markets in the stock market shrink?
Nothing we can do about it, but I'm still interested in finding a good way of viewing the combination order book. Does anybody know if TradeStation allows to view the book?
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I misunderstood. I thought you were trying to trade the box on both sides (like a market maker).
I understand the motivation to trade a box. I have 10mm of my portfolio funded through them right now.
but I don’t understand why you think you will get a better price by interacting with the combo order book. Spx boxes are pretty liquid. You don’t have to cross bud offer to trade. Put in a order like 1 or 2 points from mid and you will probably get filled.
how confident are you that you couldn’t buy your box for zero. That would be an aribitrage for your counterparty.
Sorry I'm not sure about points, as I only sell box spreads, which I think basically trade as a whole on interest rates and not on points, and as such I think the point spread depends on the strike prices i.e. the size of the box. My understanding is that box spreads trade at tighter spreads than the sum of the individual legs, purely based on implied interest rate.
Fed funds rate and Libor are around 0.1% (which is also consistent with the mark price that IB indicates on the boxes), and sell box spread orders get filled at around 0.5% these days. I have never bought a box as it wouldn't make sense to buy one at negative implied rate, but I tried to buy one slightly above 0% and it never got filled. I conclude that the interest rate spread is at least 0.5% when you blindly put in box spread orders and wait for the market makers' robots to find and fill them (which usually happens within a second IF they ever get filled). If someone has a different experience, please let me know.
newwurldmn - if you have a better experience than I, then please post specific implied rates or expiration/strike prices/fill prices for your SPX box spreads. Buy the box orders if you ever bought any, otherwise your sell box orders. That way we have specific data points. Thanks!
Sorry I'm not sure about points, as I only sell box spreads, which I think basically trade as a whole on interest rates and not on points, and as such I think the point spread depends on the strike prices i.e. the size of the box. My understanding is that box spreads trade at tighter spreads than the sum of the individual legs, purely based on implied interest rate.
Fed funds rate and Libor are around 0.1% (which is also consistent with the mark price that IB indicates on the boxes), and sell box spread orders get filled at around 0.5% these days. I have never bought a box as it wouldn't make sense to buy one at negative implied rate, but I tried to buy one slightly above 0% and it never got filled. I conclude that the interest rate spread is at least 0.5% when you blindly put in box spread orders and wait for the market makers' robots to find and fill them (which usually happens within a second IF they ever get filled). If someone has a different experience, please let me know.
newwurldmn - if you have a better experience than I, then please post specific implied rates or expiration/strike prices/fill prices for your SPX box spreads. Buy the box orders if you ever bought any, otherwise your sell box orders. That way we have specific data points. Thanks!
I wanted to follow up on this discussion. I was actually able to buy back an SPX box at an implied rate of ca. 0.45% that I previously sold by mistake for ca. 0.55%. So I am correcting my previous posts. The effective bid/ask spreads of boxes that can be achieved are smaller than I previously thought.
My understanding is that the midpoint of ca. 0.5% reflects about the so called equity index repo rate, which is also about the implied financing rate embedded in equity index futures. I find it curious that with options one can get ca. 0.45% risk-free for cash, which I think is higher than money market rates.
Now what if I sell a box of treasury options or treasury futures options? The discount rate for treasury options and treasury futures options should be the general collateral repo rate because of the put/call parity and cash-and-carry arbitrage, as I can create a synthetic version of the underlying with options, right? Would I be getting a loan at the general collateral repo rate of close to 0% ?
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I wanted to follow up on this discussion. I was actually able to buy back an SPX box at an implied rate of ca. 0.45% that I previously sold by mistake for ca. 0.55%. So I am correcting my previous posts. The effective bid/ask spreads of boxes that can be achieved are smaller than I previously thought.
My understanding is that the midpoint of ca. 0.5% reflects about the so called equity index repo rate, which is also about the implied financing rate embedded in equity index futures. I find it curious that with options one can get ca. 0.45% risk-free for cash, which I think is higher than money market rates.
Now what if I sell a box of treasury options or treasury futures options? The discount rate for treasury options and treasury futures options should be the general collateral repo rate because of the put/call parity and cash-and-carry arbitrage, as I can create a synthetic version of the underlying with options, right? Would I be getting a loan at the general collateral repo rate of close to 0% ?
I haven’t looked at pricing for any other boxes besides spx boxes, but you should take a look at how it prices. I imagine you will find something similar to what you see in spx boxes and the one with the best price for you will be the one with the most liquid listed options market.
I haven’t looked at pricing for any other boxes besides spx boxes, but you should take a look at how it prices. I imagine you will find something similar to what you see in spx boxes and the one with the best price for you will be the one with the most liquid listed options market.
I understand the more liquid the market the better, all other things being equal, because the pricing will probably be more consistent. And the SPX options market is the most liquid and convenient, as they are cash settled European style options. But I'm wondering if I could get lower rates using treasury options or treasury futures options, from a theoretical point of view.
I understand the more liquid the market the better, all other things being equal, because the pricing will probably be more consistent. And the SPX options market is the most liquid and convenient, as they are cash settled European style options. But I'm wondering if I could get lower rates using treasury options or treasury futures options, from a theoretical point of view.
My 2c - From a theoretical point of view if the options are listed on the same exchange and cleared in the same manner I would not expect you to find a better rate. Theoretically the box on European cash settled options has nothing to do with what the underlier is, it’s purely a financing trade.
My 2c - From a theoretical point of view if the options are listed on the same exchange and cleared in the same manner I would not expect you to find a better rate. Theoretically the box on European cash settled options has nothing to do with what the underlier is, it’s purely a financing trade.
I agree it's purely a financing trade, and not *directly* related to what the underlying is, and in fact not at all related to the performance of the underlying. But there must be some justification why it is currently about 0.5%, right? 0.5% is not just an arbitrary number that market participants clandestinely picked and agreed to use as the discount rate when trading futures and options. 0.5% is rather the equity repo rate, and the implied financing cost of futures and options has to be related to the repo rate of the respective underlying because of the cash-and-carry arbitrage, right? What is the equity repo rate for derivatives based on equity indexes, is the GC repo rate for derivatives based on treasuries, or not?
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