only get a few hundreds a month in interest. Should probably do something on cash management. IB cash balance, boxes, money market etf, t-bills, what other instruments?
While I know how a box works, I don't understand why I can trade totally OTM strikes like 100. I thought we use existing options (that is with open interests) to create synthetic creidt/debit. Can you please explain who and why would those options be traded, besides MM giving me liquidity to get a box done and charging for the cost of hedging?
The people trading the other side of this box don't care about open interest of an option. They (most likely market makers) know what their cost of capital is and the box will have an edge at a certain price for them.
So they trade those no-value options for people trying to do boxes? what else. If those options are purely created for boxes without other economic rationale, the spreads would be substantially higher than otherwise liquid strikes. so how can you compare trading many more liquid strikes vs a few no-rationale strikes ?
No, they weren't created for trading boxes. Options aren't delisted once the have no/little value. For instance right now the SPX Dec 2020 100 puts are trading for .05. They don't have "no value" even though they are far out of the money. When the were first listed last year, they were trading for .15. You are getting to wrapped up in the whole liquid/illiquid open interest/little open interest or whether one leg of a box is "worth" anything. A trader may pick the widest box possible to generate the most debit/credit for the least commissions. It is then traded based on an implied interest rate. None of the traders care about liquidity or price of the individual legs.
I want the widest box possible to minimize # of contracts, but those little-value ones have very wide spreads right, so the price is worse than liquid ones --> poorer implied interests, then wouldn't it become a commission/more contracts vs spread/less contracts question?
The spreads and the price of the individual options are meaningless. The market maker/trader is trading the box as a whole. He doesn't care about each leg of the box. Forget the individual legs.
I getting what your point is, from a box user perspective, but still behind the scene the dude on the other side gotta look at it from a per-leg view, no? so from his point, what's the point for selling me a 100 call and buying a 100 put from me? that looks little rationale to me? if so, doesn't he charge a higher fee for that service. If there were a market for 100-3000 boxes, then fine, but the strikes are arbitrary, so the for-example 100 strikes are just traded for the sake of offering me an easy way to do a box, no?
Yes the market maker is only doing it for the sake of offering you a box. As FSU stated, their cost of capital is lower than yours, so they effectively making money on the spread between their cost of capital and the implied rate you got with the box. The individual legs are absolutely, completely, without a doubt, entirely meaningless, full stop!
Okay, so what you guys are saying is the mkt maters trade and hold a box in its entirety. Then wouldn't an equity market maker end up with quite a few money market positions (not like box orders are routed to someone else)?