Selling SPX boxes for interest

Discussion in 'Options' started by FSU, Apr 3, 2018.

  1. FSU


    Noticing the June 3000 (500 call, 3500 put) point box trading in the SPX today for an effective yield of about 2.2% (annual). So if you bought 1 box it would equal lending $300,000. Commissions minimal as only the two deep sides trade, so depending on your rate, just a couple of bucks as it is only 2 options.
    Sig and destriero like this.
  2. Robert Morse

    Robert Morse Sponsor

    What price did it trade at and how many times?
  3. FSU


    Lots of smaller trades, 5 lots or less throughout the day, not too many total, under 50 last I saw, but all were at 2987.05 for the June monthly expiration, 3500 put, 500 call.

    I realize that's not a lot in total, but its a good representation of where you could be filled as many smaller lots filled at the same price throughout the day.

    72 days to expiration, making 12.95 on a 2987.05 investment. If my math is right, 2.2% return, annualized.
  4. FSU


    To explain this a bit better. You buy the SPX June 500 call, and the SPX June 3500 put. To complete the box you would also sell the June 500 put and the June 3500 call. The last two are both at zero, so the trade that took place today only included the "meat" of the box and the legs that were at zero weren't included.

    If you buy the box 1 time for 2987.05, you are spending 298,705 and on expiration, you will receive $300,000. You are effectively loaning money out.

    If you sell the box, you are borrowing money. you get $297,705 and will repay $300,000 at expiration. You are doing this at about 2.2% interest.
    trader42 likes this.
  5. JackRab


    So... you're fine with just 2.2% yearly? o_O

    It's just market conform... LIBOR interbank 3 month is at 2.3%. Treasury 3 month is at 1.75...

    I'd almost do the reverse... not many places give you a loan at 2.2% to trade with... (not saying over-leverage)

    "Leveraging Kills - Quit Leveraging While You Still Can"
  6. Robert Morse

    Robert Morse Sponsor


    I spoke to FSU offline. The purpose of both sides doing this is not always to lock in that rate but often to offset other option or long stock balances.

    E.G. For the Seller. These spreads are typically initiated by the seller-IMO.
    PMA Size $1mm
    long stock + long options + short options net balance of $2mm.
    If I sell $1mm in option spreads that are risk-less, I save on paying interest on $1mm to my broker, If I can sell that option spreads for less of a loss than the interest cost, that would be why I would sell that spread above.

    Then you need someone wiling to buy that spread above for 2987.05. Although they will make the difference between the price they pay net of CBOE fees, reg fees and commissions, they will incur a large debit balance. The margin for a MM or PMA account on this is not much, but it works best when the buyer has a high option credit balance to offset the debit for the spread. Both side benefit. Mostly the CBOE!
  7. FSU


    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.
  8. Robert Morse

    Robert Morse Sponsor

    For an account that does not use their cash overnight (Shorting stock, net short options, day trading), you can fund with a 1 year T-bill a part of your account and get very good short term rates.
    truetype likes this.
  9. That's the definition of an elite trader...under-performing the market...and for some strange reason...being happy and proud of it.
  10. dealmaker


    #10     Apr 4, 2018