On Natenberg's book Option Volatility & Pricing: Advanced Trading Strategies, he talks about how being short a box (being in a synthetic long and synthetic short at the same time, with different strikes) is pretty much like borrowing funds. What are the margin requirements associated with that? Can they fluctuate in a flash crash type situation? What about the interest rate compared to a broker magin rate? Does it offer benefits from a cost-risk perspective?
I'm also interested in this. I do funding trades in SPX options and wonder what the best possible methods there are to minimize the bid/ask spread to capture a low interest synthetic loan. I'll comment later on what I do if nobody else responds, Daal.
Here's the theory behind this trade. Say your broker gives you no interest on a credit balance in your account, but charges you 5% on a debit balance. Say you have $100,000 in your account and buy $400,000 worth of stock with some options in relatively hedged position. Your risk is limited, but you are paying 5% interest on that extra $300,000. Now say you sell the 100/3100 box in the spx. You are bringing in almost $300,000 in credit balance so you no longer have to pay the broker any interest. The market maker who sold you the box may be happy making 2% on his money and will discount the price of the box to reflect this interest rate, so you are effectively borrowing money at 2%. So what is the risk of this strategy? You are dealing with a cash settled, European exercise, so your only risk is that there may be a bad mark and your account balance may fluctuate a bit, but since you are only short 1 box here, that risk is negligible. The market for boxes is really quite tight in the SPX. If you were to do this, Determine the max interest you want to pay (by what you are willing to sell the box for) and enter it as a spread, first at a slightly higher price and then walk it down. Some brokers won't let you trade very expensive options, and there may be policies not allowing you to do this type of trade, as it reduces their profit center of high interest rates. Whether it is worthwhile all depends on the interest rates you are being charged.
Interest rates would be very efficient, treasuries... cash market rates... A lot less than your broker charges you. I don't know how margin is calculated with retail brokers... I guess on a portfolio margin it shouldn't be much... If the amount received is going to be the total margin, there wouldn't be a point in this...
This is a form of convervative leverage. You only have to pay back the 'loan' at expiration. So you can assume some positions knowing you will be fine all the way to exp (in the case of European style options). With a broker margin loan, they got all kinds of liquidation policies. Also a broker interest is usually higher
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...
I meant the fact that the loan is non-recourse. If someone goes out takes the proceeds and loads up in stocks on a 4-1 basis, then that wouldnt be conservative at all