SPX box spreads for cheap margin

Investing / Others
1

Hi ! First post but long time lurker here.

I wanted to talk about something I haven’t seen discussed around here : selling SPX box spreads for cheap margin. I need some Swiss perspective on it. I’ve seen a few posts regarding the use of margin, so maybe some of you would have a use for this.
I invest with moderate margin, following a version of lifecycle investing. My basic strategy was to deleverage if I didn’t have access to cheap margin anymore. But box spreads are the recommended way of getting leverage on the original post of the Lifecycle investing topic on the bogleheads forum, and it does seem like an interesting alternative.

Here are a sources that discuss the strategy and will explain it better than I can :

So when you trade the box, you get cash, which you will have to repay on expiration, with an implied interest rate that is usually pretty low. It doesn’t change the amount of leverage available (maybe reduces it a little bit), but if you already use margin you can use the cash to keep your balance >0, and avoid paying the broker interest, assuming you’ve traded your box at a better implied rate. Or if you don’t invest on margin and you know what you are doing, you could take the money out of the account and do whatever.

  • Pros : cheap margin ; fixed rate ; seemingly low risk if you don’t leverage too much
  • Cons : unclear how the IBKR algorithm would treat them during a crash and supposedly the algorithm could react badly if the legs are not priced correctly (I found no evidence it happened, but it is often discussed and this is what would hold me back the most) ; you take interest risks, because interest rates could get lower than the implied rate you took ; requires trading options, and being extra careful to avoid making mistakes while trading.

Thoughts? Ever heard of that strategy? Am I missing something ?

Questions :

  • Not sure about the tax implications in CH. And how do you declare them ?
  • SPX seems to be the preferred option, because of its liquidity. But would there be other good options for EU or swiss investors ? I think some on the bogleheads forum were able to get negative interest rates with EU options.
1 Like