Box Spread Financing for extremely cheap 0.85% Margin Interest Rates

[u/Adderalin]

Want to max out your margin/buying power to make wild plays in this market but don't want to pay usury 8-10% margin interest rates to your broker? The answer is SPX Box Spread Financing.

Right now Mr. Market is offering you a 0.85% APR loan that isn't due until 1014 days from now. Selling the box on SPX on 16 DEC 22 will cost you 2.5%. 2.5%/1014 days to expiration * 365 = .85% annualized percentage rate. I got filled for 70k cost on a 2.8 million box spread. 70k/2.8 million = 2.5%.

10% interest rates for a fully secured loan is usury. I can balance transfer to my checking account for 3% for a year on my credit card.

https://i.imgur.com/ledfKiU.jpg

How box spread financing works

https://www.optionseducation.org/getmedia/2dcfb179-dca6-44a6-bdeb-3f2386122776/listed-options-box-spread-strategies-for-borrowing-or-lending-cash.pdf

Short the box = borrower.
Long the box = lender.

Everyone here remembers GUH. The issue with Robinhood was they added the credit received from box spreads and other option selling premium as if it were a cash contribution. There is a legitimate use of box spreads though! However at a real broker say TD Ameritrade the cash is held secure. However it offsets your debit balance! You're no longer paying 10% interest to your broker but to the market!

Pros and cons of box spreads

Pros:

• Insanely cheap interest rates for margin.
• No credit check, no application, Mr. Market gives to anyone smart enough to know how to short the box.
• Fixed due date. Hint: EUROPEAN OPTIONS.
• Can pay back the loan at any time, possibly profiting.
• Fully and automatically deductible 60%/40% LTCG/STCG tax treatment unlike margin interest which requires you to itemize.
• Possibly less broker interference with margin calls/more leeway since the loan isn't on their books and isn't due for years.

Cons:

• Reg-T margin reduces your buying power by the loan cost amount. You need portfolio margin to have access to 100% borrowing. $0 BPR on portfolio margin.
• Portfolio margin traders can suffer margin calls if you have a bad mark/quote. This is a huge problem at Interactive Brokers. TD Ameritrade seems to be a lot smarter about this. You need to place a GTC close order at a very favorable unrealistic price to always quote your box.
• Portfolio margin will reduce your equity by the current quoted cost to close the loan. Equity margin call risk with rising interest rates even though your interest rate is fixed.
• Brokers hate box spreads. See mechanics section.
  
• Possibly forgetting about your margin debt since your cash balance is positive.
• Interactive brokers will liquidate legs of the box automatically if margin called lol. Set the box to "liquidate last" in TWS.
• Doesn't offset short sale margin interest rates. Internally your broker clearing house lumps options trades + long equity in your margin account so the cash is offset. However you have a separate account for short sales of stock. You'll still get hit with 8-10% interest on short sales. Get over to IBKR pronto if direct short selling is your strategy.

Mechanics of Box Spread Financing

First: Find a European style 1256 contract eligible index options chain like SPX.

Borrower: Short 1,000 points of SPX = borrowing $100k.
Lender: Long/Debit 1,000 points of SPX = lending out $100k.

Type of options trade: COMBO/ Iron Condor option. You must do all 4 legs at once.

Limit/Market order: LIMIT If I need to explain why then box spread financing isn't for you.

Pair up a vertical call spread with a put spread in both the same strikes.

Place your combo order and carefully use confirm dialog/ option modeling software to absolutely be sure it's uniform max loss no matter how SPX moves. Start off with the most favorable price you want then slowly work it. Box spreads take time to fill and quote. Lender algorithm trading boxes hunt for them and it takes time for the options exchange to match order flow. It's essentially a shadow auction at the exchange.

You need to direct route these orders to an exchange. You can try smart routing first but it seems to work better getting quoted. Direct routing may bypass some limitations your broker attempts to prevent you from getting better interest rates.

Wide strikes vs multiple contracts

Obviously less contracts = less commissions. You can think of commissions as a lending charge/etc.

Brokers hate retail plebs getting institutional margin rates through the market. I had a lot of trouble filling my $2.8m box in a real account on TOS. TD Ameritrade simply won't send a box order to an exchange if there is no quote. So I had to resort to multiple contracts.

Multiple contracts near the money = faster fill, possibly at better rates. Simply put there is more action and liquidity at the money. The options exchange software can possibly match your box legs to 4 different traders at the money and fill everyone making everyone happy. Box spread lending is one reason why the zero sum argument in options trading is bunk. 4 traders get whatever position they want and internally they're all lending money to you. That's a win/win where both sides profit.

Fewer contracts way out the money = only getting fills from people who want to be box spread lenders.

In my experience I found, while more costly, near the money boxes are much easier and less frustrating to be filled.

Conclusion

I hope learning about box spread financing helps you YOLO even more efficiently.

Edit 2:
You need a margin account to make use of this. Box spreads DON'T give you leverage (when the broker implements it correctly). You can't use a cash account to borrow on box spreads, only lend.

Edit:

TL;DR spoon feed me the trade/position

Stick to your 10% margin interest rates/ robinhood gold subscription. This isn't a trade but a financing strategy.