Selling SPX boxes for interest

[Robert Morse]

Pros get the cash proceeds. Retail does not.

Not sure what you mean by that so I'll provide some details. Some institutional accounts get paid on credit balances in a type 2 margin account and all market makers do. Many retail accounts do not get paid on type 2 credit balances and if they do it is nominal. Where a retail client can benefit is if they are borrowing based on a high debit balance in a PMA that they can offset with a credit box. E.G. PMA with $500,000 in equity and a debit balance in the type 2 account of $1mm. (Borrowing $500K) If they can sell a box in SPX for more than $500K, it will reduce the debit to not borrowing. If the cost of the box including fees is less than the interest charges, and it does not cause a margin call, it will save money. A type 2 margin account contains cash from a margin account, long stock plus long and short calls. It does not contain short stock.

 

[newwurldmn]

Not sure what you mean by that so I'll provide some details. Some institutional accounts get paid on credit balances in a type 2 margin account and all market makers do. Many retail accounts do not get paid on type 2 credit balances and if they do it is nominal. Where a retail client can benefit is if they are borrowing based on a high debit balance in a PMA that they can offset with a credit box. E.G. PMA with $500,000 in equity and a debit balance in the type 2 account of $1mm. (Borrowing $500K) If they can sell a box in SPX for more than $500K, it will reduce the debit to not borrowing. If the cost of the box including fees is less than the interest charges, and it does not cause a margin call, it will save money. A type 2 margin account contains cash from a margin account, long stock plus long and short calls. It does not contain short stock.

What is a type 2 account?

 

[Robert Morse]

Type 1 CASH
Type 2 MARGIN
Type 3 Short Stock

 

[entropytrading]

I think box spreads are 0 margin, but i wonder if i have net cash balance but very little margin availability/liquidity remains (not enough for a naked SPY option position), how does the broker know I intend to do a box spread at time i enter into the first leg?

 

[Robert Morse]

I think box spreads are 0 margin, but i wonder if i have net cash balance but very little margin availability/liquidity remains (not enough for a naked SPY option position), how does the broker know I intend to do a box spread at time i enter into the first leg?

Don’t leg, enter it as one spread

 

[entropytrading]

Obviously that applies to all spread option and futures trades, so in term of margin requirement, legging in will result in debit margin, then as the whole spread completes, credit margin to the spread margin?

So in case of nil excess margin, I need the execution software to route a preset spread trade? What if the software doesn't have any preset combo ? So any limit order for a leg won't be initially recognized as a spread?

 

[Robert Morse]

Obviously that applies to all spread option and futures trades, so in term of margin requirement, legging in will result in debit margin, then as the whole spread completes, credit margin to the spread margin?

So in case of nil excess margin, I need the execution software to route a preset spread trade? What if the software doesn't have any preset combo ? So any limit order for a leg won't be initially recognized as a spread?

If your software does not allow complex spread option orders with 4 legs, you need a new broker with better platforms.

 

[entropytrading]

so i need the intended spread to be pre-configured in the order execution software in order for the clearing broker to see my whole spread trade for margin calculation? So all legs must be take-liquidity orders? is that the idea?

 

[entropytrading]

So can anyone describe how the margin requirement evolves when legging into a spread trade? pls no this platform or that broker or shouldn't leg BS, trying to have a better idea how margin changes during the process.

 

[Robert Morse]

So can anyone describe how the margin requirement evolves when legging into a spread trade? pls no this platform or that broker or shouldn't leg BS, trying to have a better idea how margin changes during the process.

You need to have the available margin for the first spread, then your platform or broker has a process for pairing off positions into spreads. assuming they pick up your spread as a box, after you have that on, they use that requirement.