Selling SPX boxes for interest

FSU said:
Well, IB is paying around 1% on credit balances, other brokers zero. So if you had free cash it may be worth it. Also it could be great to borrow at that rate as well.

Cost to put this position on would be about $3 per 300,000 as you are only trading 2 contracts.
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I would do t-bills instead... easier to get out of and probably fees are lower as well.

If you need that free cash to trade and don't want to sell that box again for whatever reason, I don't know how IB handles your long box... don't know if that cash if locked... you would probably trade on margin, costing you more than you are getting on that box.

Professionals trade differently. They might trade into a box due to individual legs they've traded. Then they either hold or sell it, depending on what rates they are getting with their bank/clearing-firm.

All up... selling a box makes more sense at these rates for individuals....
 
@Robert Morse in my experience, pros would rather sell boxes as well... or buy them to eliminate/reduce positions in strikes. I always traded into a box position by trading individual legs and end up in it... long or short. Then cash management would dictate whether to hold or reduce... but usually if you're holding a long box you'd try to reduce, since that's a capital hoard.
 
JackRab said:
@Robert Morse in my experience, pros would rather sell boxes as well... or buy them to eliminate/reduce positions in strikes. I always traded into a box position by trading individual legs and end up in it... long or short. Then cash management would dictate whether to hold or reduce... but usually if you're holding a long box you'd try to reduce, since that's a capital hoard.
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I personally, as a customer or MM, would never buy a box in a cash settled index as a trade. I have legged into and trade boxes in equity options, many,many times over the years.
 
Robert Morse said:
I personally, as a customer or MM, would never buy a box in a cash settled index as a trade. I have legged into and trade boxes in equity options, many,many times over the years.
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Exactly :thumbsup:... I don't really see the point. I guess if you'd be doing some kind of big credit spread... you could look at short T-bills vs a long Box... but I think you'd be left with some risk.

In case of a bankruptcy of your broker, I think you're left holding the bag this way. Options/derivatives vs a bond, is that treated the same in a bankruptcy?

I'd take long Tbills over a long box anytime. That 50 bps over a year isn't much really. I know people who would go for an extra 0.5% and end up in shit creek because they underestimated the added risk.
 
JackRab said:
Exactly :thumbsup:... I don't really see the point. I guess if you'd be doing some kind of big credit spread... you could look at short T-bills vs a long Box... but I think you'd be left with some risk.

In case of a bankruptcy of your broker, I think you're left holding the bag this way. Options/derivatives vs a bond, is that treated the same in a bankruptcy?

I'd take long Tbills over a long box anytime. That 50 bps over a year isn't much really. I know people who would go for an extra 0.5% and end up in shit creek because they underestimated the added risk.
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Those risks are not part of my criteria. The concern for me is not the BD having a SIPC event. The concern is how do I use my limited cash. In a simple example, if I buy $1mm in non-risk options spreads (cash settled indexes have no pin or early assignment risk), that $1mm is not marginable and can't be used for anything else. If I buy $1mm in T-bills, I get paid a return and can use 95% of that value toward other trading with margin, such as day trading, short options, short stock etc..
 
Robert Morse said:
In a simple example, if I buy $1mm in non-risk options spreads (cash settled indexes have no pin or early assignment risk), that $1mm is not marginable and can't be used for anything else.
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I'm not familiar with margin for professional traders, but this isn't the case at IB. With a PM account, cash is almost irrelevant, unless you're trading futures. For example, suppose you initially have $10M in cash (I'm choosing a large size just so that the lower margin rates apply). Your account looks like:

Net value: 10M
Margin: 0
Excess liquidity: 10M
Cash 10M

Margin on a box spread is about 1%, so if you put $10M in a box spread, you have:

Net value: 10M
Margin: 0.1M
Excess liquidity: 9.9M
Cash: 0

Later, you decide to buy $10M in SPY (~10% margin):

Net value: 10M
Margin: 1.1M
Excess liquidity: 8.9M
Cash: -10M

Now you're short $10M in cash, so you pay IB ~2% margin interest, but you're also earning ~2% on the box spread, so it's basically the same as if you just held SPY and no box spread (until taxes come in). If you mostly hold cash and go in and out of positions a lot, holding box spreads can make sense.

Did margin work differently for you as a professional trader?
 
elt894 said:
I'm not familiar with margin for professional traders, but this isn't the case at IB. With a PM account, cash is almost irrelevant, unless you're trading futures. For example, suppose you initially have $10M in cash (I'm choosing a large size just so that the lower margin rates apply). Your account looks like:

Net value: 10M
Margin: 0
Excess liquidity: 10M
Cash 10M

Margin on a box spread is about 1%, so if you put $10M in a box spread, you have:

Net value: 10M
Margin: 0.1M
Excess liquidity: 9.9M
Cash: 0

Later, you decide to buy $10M in SPY (~10% margin):

Net value: 10M
Margin: 1.1M
Excess liquidity: 8.9M
Cash: -10M

Now you're short $10M in cash, so you pay IB ~2% margin interest, but you're also earning ~2% on the box spread, so it's basically the same as if you just held SPY and no box spread (until taxes come in). If you mostly hold cash and go in and out of positions a lot, holding box spreads can make sense.

Did margin work differently for you as a professional trader?
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my quick answer is that i’m Not talking about margin, I’m talking about Cash. If you buy the box and then use cash to buy stocks, at some point you will be borrowing money from your broker. Happy to describe the difference between market maker margin and portfolio margin over the phone one day, as it would take too long to type.
 
Robert Morse said:
my quick answer is that i’m Not talking about margin, I’m talking about Cash. If you buy the box and then use cash to buy stocks, at some point you will be borrowing money from your broker.
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Certainly if your trading strategy doesn't leave you with excess cash, it's pointless to buy a box spread. Would you agree with the following statement: If you typically have a fluctuating excess cash balance, you can put it in a box spread and still trade as normal with your margin largely unaffected. You might sometimes end up borrowing from your broker, but that just roughly cancels out the return on the box spread during those periods.
 
JackRab said:
@Robert Morse in my experience, pros would rather sell boxes as well... or buy them to eliminate/reduce positions in strikes. I always traded into a box position by trading individual legs and end up in it... long or short. Then cash management would dictate whether to hold or reduce... but usually if you're holding a long box you'd try to reduce, since that's a capital hoard.
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Pros get the cash proceeds. Retail does not.
 
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