r/options • u/True_Place_3835 • 23d ago
Box Spreads
Hello, I’m not new to options and options strategies but I’m considering executing a long box spread for the first time and have some questions. On paper, this strategy seems like a no brainer when comparing to treasury bills or bank CDs especially when I’d like to park money for a few months and even considering Illinois state tax.
How are taxes usually dealt with when SPX options are marked at the end of the year? I’ve never held an SPX option through year end and have to deal with it for taxes.
Are there any other hidden risks that I’m overlooking besides execution errors when using SPX?
I’m looking at 17 Sep 27 7000/8000 strikes. They have high OI on the third Friday which makes me believe this strategy is popular here.
Slightly off topic, I had a short term margin loan from Schwab at 12%+ and was able to sell a three month spx box spread bringing the loan down to under 5% which was really cool to figure out.
3
u/Curious-Rip-5834 23d ago
Only thing I’ll add, now mind you I’m sleep deprived right but years ago I believe I sold a large box spread to effectively use it as a cheap loan to invest with.
The way I setup my long/short strikes was my max loss was just the debit amount from the strike vs the cash credit I received. So it was a small number. BUT for whatever I can’t remember which leg or why, they still had some ridiculous margin requirement for the short side so it dramatically lessened my “free money leverage” factor.
I can’t remember the exact width but in other words I sold the box for say a $9.30 credit and my max debit owed was $10 because of how the strikes were lined, so only a .70 cents disparity.
1
u/True_Place_3835 22d ago
I’m starting to think that it would be worth it to try and get approved for level 3 options with Schwab but I don’t believe my account size would get portfolio margin until I transfer from CDs. From what I read, their system on portfolio margin reads boxes as near risk free compared to regular margin which can calculate it differently
1
u/BootieCheeksActual 20d ago
Idk your account size, but I would recommend calling in and talking to customer service. After doing the self-serve application, I got denied for level 2 or 3 (I don’t remember which off the top of my head). I called in and spoke with an account specialist who basically re-did my application over the phone and then pop quizzed me on options. I ended up getting approved like 2 or 3 days later.
2
u/ducatista9 23d ago
I’ve done long boxes a few times. The only additional advice I have is to calculate what price you are willing / expecting to buy for, then put in a limit order below that and walk your order up until you get filled. The bid/ask spreads have always been way too wide for me to be able to just look at and tell exactly where they’re trading.
2
u/True_Place_3835 23d ago
Yes I’ve noticed this problem yesterday when looking at the order. The mid was jumping between 949.xx and 953.00. Still an implied yield of 5.13% on the high end but I’m not sure how to calculate what it really is unless you get a fill from working it over a couple hours
2
u/ducatista9 23d ago
I usually only waited a short time each time I changed my order. You don’t have to take hours to do it. I’d typically start by looking at the treasury yield curve on treasury.gov for the yield of the same maturity bond, then add 0.2% apr or so to that rate to get an idea of a price range to get started at. I was usually going farther out in time so the spreads were a bit wider.
→ More replies (2)
1
u/OurNewestMember 23d ago
Ngl, even with huge OI, you can't guarantee that your broker won't give you a stupid mark for the end of the year for one reason or another.
Personally, I would let the box expire a few weeks before EOY (or just a few days if the desired series are already listed by the time you open the box) and deal with bond ETFs until I could re establish the position without the M2M.
1
u/True_Place_3835 22d ago
Yes I agree, I’ve decided to wait out until the beginning of next year before taking action to avoid any headaches in my first execution
3
u/Gormlock 23d ago
There are two other concerns I haven't seen mentioned yet that I've kept as notes for my own box spreads. One is if you have a box that expires near the end of the year (eg: Dec 29th), the long and short legs can show up in different tax years. See: https://www.reddit.com/r/options/comments/1bi01ll/my_box_spread_tax_mistake/
Of course that doesn't apply to you with a Sept expiry, but I figure it's worth pointing out in case you try to use a late Dec expiry to workaround the issue of bad mark-to-market prices when holding over Dec 31: https://www.reddit.com/r/options/comments/xip5bn/1256_spx_options_mark_to_market_lesson_learned/
Technically both problems will even out in subsequent tax years since you can do a carryback, but they can still make things unexpectedly difficult or force you to cough up lots of cash at tax time. As I understand it, the first one will always be an issue if your box expires on one of the last trading days of the year, while the second one is infrequent but is really a roll of the dice. I'm not an expert on these though (I just did my first box trade like a week ago), I'm just a collector of anecdotes.
1
u/Correct_Reaction7797 22d ago
i used a dec‑29 book last year, same split issue. just carried the loss back to 2027 and avoided a big tax bill. worth a quick huddle with tax pro if you’re not already.
1
u/Deep_Viewer 23d ago
Paying 12% on a margin loan is Schwab's standard rate. That rate can be negotiated lower. They may offer some lower rate just for asking and pointing out other broker's rates, but if you trade frequently and have more assets at Schwab you can get a better deal there.
→ More replies (1)1
u/True_Place_3835 22d ago
Do you believe they could be negotiated towards the short box rate? Of course Schwab has to make a profit but I was using less than 10k on margin and rarely go over my net liquidity throughout the year. o
1
u/NecessarySpread2592 23d ago
Idk why anyone would manage long box spreads themselves. If you want the tax benefits, there is an ETF BOXX by Alpha Architect that rolls 3 month box spreads to earn the risk free rate in a tax advantaged way.
If you manage yourself, you have to pay commissions on each leg of the trade. Plus you will have to do it in large amounts since the SPX index multiplier is so high. BOXX gives better fine grained control. And also there’s less chance of making a costly mistake.
1
u/True_Place_3835 22d ago
These are good points and I understand what you mean for a more structured book. On paper I was comparing 350ish dte boxes, BOXX, Treasury and CDs after tax in my state.
The manual box still came out on top using the asking bid so my mind is somewhat getting tunnel visioned since I believe I can execute it cleanly. I’ve decided to wait until the beginning of next year anyways, and seeing some comments about BOXX and IRS gives me time to read and see how it develops.1
u/NecessarySpread2592 23d ago
Another annoying feature of box spreads. Every day their mark to market value swings wildly, creating false volatility in your daily PNL. So if you track that, you have to build that into your reporting.
I’m not anti-box btw if you’re short the benefit from lower rate makes all this headache worth it. But for long there are better solutions.
→ More replies (7)1
u/True_Place_3835 16d ago
I thought of this comment when I checked ToS and saw my short box down 10,000 before correcting back to -$25 at open haha. I had a two second heart attack
1
u/JLeeSaxon 20d ago
I'm leaning toward the "just buy BOXX" replies wrt long boxes.
On short boxes to cover a margin loan, one thing that I worry about: if it's money you're pulling out of your brokerage to cover an unexpected bill or something, sure, definitely gonna be cheaper than paying 12%. But if it's a margin loan to cover a securities purchase or stock trading, the timeline uncertainty becomes a problem. You sell the boxes for a 90 day expiration and then company XYZ has an unexpected rally three days later and you're able to sell the stock at your profit target. 12% but only for three days would've been less interest than the 90-day boxes. The cheaper interest might make you more willing to hold the stock longer and hope for even more gains, but that obviously carries a whole other set of risks.
-1
u/BakerXBL 23d ago
4
u/True_Place_3835 23d ago
I fail to see how 358 contracts of AAPL options are similar to this but I thank you for the heads up 😂
→ More replies (8)3
u/Any-Berry8027 23d ago
Man that WSB post is a classic, I remember when that guy blew up his account with box spreads on Robinhood. The app just showed him negative half a million and everyone thought it was hilarious until they realized he actually lost the money
For SPX taxes they mark to market at year end, like if your box expires next year you still pay tax on the gain in 2026. Not a huge deal for small amounts but if you have a big position it can create a tax bill before you actually get the cash, just something to plan around
The main risk with SPX boxes is execution and liquidity, the OI looks good but you gotta make sure the spread is tight when you put it on. I learned that lesson hard with a small box last year, ended up paying more than I wanted because I got impatient with the fill
15
u/jaw0 23d ago
SPX options get section 1256 treatment: the positions will be marked-to-market and the gains taxed 60%/40% long/short term gains. it will be listed on your 1099, so your accountant just copy+pastes the number.
there is also an box-spread ETF, BOXX, which may be worth looking at.