Shorting boxes as a funding strategy

[Daal]

Looking at midpoints in 2125-2150 dec'18 SPX the value is at 24.10, so 3.7% for the 2 yrs and 2 months... so 1.7% annualized

... sounds a bit cheap.... should be more like 24.50 at 0.9% annualized

Probably better too look at the active market and not now.... last quotes on individual options were pretty wide as well at $6 spreads, so my attempt is a bit futile I must admit...

Tks.
This is a fun little trick to know, maybe I will use it one day when markets are cheap and oversold and I want some extra exposure. But I probably wouldnt go above 1.4-1.5 to 1 leverage

 

[water7]

by conservative, do you mean bonds?
is it worth it?

 

[Daal]

by conservative, do you mean bonds?
is it worth it?

I mean you dont run the risk of having the broker change the rules on you and ask for the money back (or pop the interest rate), or use some obscure clause in the margin contract, etc, etc

 

[water7]

in that sense, you are right, it is a better alternative for borrowing

but what would you do with that credit (while having a maintenance margin) is another question..

--
nice thread

 

[OneChicago]

A little fun history lesson. The S&P 500 contract was going to be delisted by the CBOE back in 1985 because no one traded it and all the volume was in the OEX. Thomas Peterffy convinced the CBOE to re-launch the product as a European exercise contract and promised he would provide liquidity if they would allow him to put computers in the pit. It was the first pit in Chicago that allowed such electronic access and it's more than ironic that it is the last pit standing.

But it was the subtle change from American to European exercise that made the product so successful as it turned the product into a vehicle by which lenders and borrowers could interact directly without the intermediation of a middleman under the umbrella of the then AAA credit rating of the Options Clearing Corporation (now the AA+ OCC). The big break for the product came in the aftermath of 1987 crash as credit and liquidity dried up and all traders were desperate for cash. The product has grown ever since and remains an effective way for savvy traders and financiers to interact anonymously.

Of course the same financing benefits can be had by utilizing Single Stock Futures.

 

[Sig]

A little fun history lesson. The S&P 500 contract was going to be delisted by the CBOE back in 1985 because no one traded it and all the volume was in the OEX. Thomas Peterffy convinced the CBOE to re-launch the product as a European exercise contract and promised he would provide liquidity if they would allow him to put computers in the pit. It was the first pit in Chicago that allowed such electronic access and it's more than ironic that it is the last pit standing.

But it was the subtle change from American to European exercise that made the product so successful as it turned the product into a vehicle by which lenders and borrowers could interact directly without the intermediation of a middleman under the umbrella of the then AAA credit rating of the Options Clearing Corporation (now the AA+ OCC). The big break for the product came in the aftermath of 1987 crash as credit and liquidity dried up and all traders were desperate for cash. The product has grown ever since and remains an effective way for savvy traders and financiers to interact anonymously.

Of course the same financing benefits can be had by utilizing Single Stock Futures.

Thanks, that's actually an interesting bit of history. We can only hope that SSFs finally have their day in the liquidity sun after a similar largely failed launch. I don't see how they can even afford to keep the infrastructure for them up with their dismal volumes.

 

[FSU]

A little fun history lesson. The S&P 500 contract was going to be delisted by the CBOE back in 1985 because no one traded it and all the volume was in the OEX. Thomas Peterffy convinced the CBOE to re-launch the product as a European exercise contract and promised he would provide liquidity if they would allow him to put computers in the pit. It was the first pit in Chicago that allowed such electronic access and it's more than ironic that it is the last pit standing.

Just to add a bit more color to the story (actually never knew the first part), computers weren't actually allowed in the pit. Timber Hill's agreement with the exchange allowed them to put them in their booths next to the pit. Visible to the their traders in the pit was a computer screen with colored boxes that represented their markets on certain options. They were supposed to tell other traders what their colored codes meant, but generally made things up. For more complex trades, they would flash hand signals to their booth and their clerks would check the computer and flash what their markets should be back to them.

Back at that time their was no computerized trading at all. Only paper sheets were actually allowed in the pits.

In the late 1980's the OEX pit had around 400 people in it, while the SPX pit was much smaller. Today the OEX pit has 2 people in it (others quote electronically), while the SPX has maybe 50.

 

[OneChicago]

Thanks, that's actually an interesting bit of history. We can only hope that SSFs finally have their day in the liquidity sun after a similar largely failed launch. I don't see how they can even afford to keep the infrastructure for them up with their dismal volumes.

Not to worry. We have been profitable for some time. We are very different from most exchanges in that our revenues are dependent on Open Interest and not just on volume as we collect a financing fee for each day the positions are open. We built all of our systems and are in complete control of the costs. What is impressive is that the firms still do not allow access to the product for customers...both retail and institutional....but they utilize the product for their own proprietary needs. Margin for uncleared swaps is going to help a great deal and when the SEC finally gets around to fulfilling their Dodd Frank mandates the business will really begin to take off.

But that is not the business that we are really after. Securities Lending and Equity Repo is the prize and I believe it is close.

Best

David

 

[OneChicago]

Just to add a bit more color to the story (actually never knew the first part), computers weren't actually allowed in the pit. Timber Hill's agreement with the exchange allowed them to put them in their booths next to the pit. Visible to the their traders in the pit was a computer screen with colored boxes that represented their markets on certain options. They were supposed to tell other traders what their colored codes meant, but generally made things up. For more complex trades, they would flash hand signals to their booth and their clerks would check the computer and flash what their markets should be back to them.

Back at that time their was no computerized trading at all. Only paper sheets were actually allowed in the pits.

That is not factual. The very first pit at the CBOE that TH placed personnel was in the S&P 500 upon the relaunch. I was the trader. We did not begin expansion into the equities until after the 1987 crash where we did in fact utilize color coded screens that we eventually were allowed to aim at the crowds. I ran floor ops at the time. For the S&P we had our computers in the crowd and eventually were allowed to 'drive' the quote boards electronically - the first time it was allowed. All before we expanded into individual equities.

Just to correct one last inaccurate statement, we were not 'supposed' to explain the color schemes to others. We volunteered as we wanted everyone to trade with us. There was never an attempt to deceive. That is incorrect.

Best

David