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.
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I just saw this post

and thought the same.

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I think for us in Switzerland, just using normal margin on IB and deducting the loan from taxes, is the better option.

Example 6.8% margin rate USD, 25% marginal tax-rate = 5.1% effective. That‘s below the risk free rate even.

You can‘t deduct a Boxspread from taxes.

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Ok I think I am offtopic then.
The article is about yield :slight_smile:

5

Same problem for leverage with futures then. Although you also don’t pay for dividends, since dividends are often less than interest, it’s not that good. A margin loan at IBKR is also much more flexible in size. The shadows of PIL (Payment-in-lieu) and professional security trader status loom though.

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What‘s the struggle with PIL?

Professional trader status I would not worry about if dividend income is more than interest from the loan you deduct from your taxes. That‘s what I understand is the official communication.

This of course limits your margin (higher with borrowed CHF, lower with borrowed USD currently)

7

There have been reports about US non-treaty rate WHT being applied to any PIL distributions. That includes distributions of non-US securities. Additonally problems getting tax credit in Switzerland. You can pretend that you just got taxed normaly on your US securities, but how do you explain the taxes on your IE securities?

No hard sources, though.

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I’m enrolled in the SYEP and just checked my last dividends in lieu. For me treaty rates are applied (so 15% wht). For several US domiciled etfs (I exclusively hold US and CH domiciled funds), holding US securities and someonly holding ex-US securities.

I don’t quite understand what you mean here.

Overall I don’t understand how a problem could arise here. In my activity report the PIL are pretty much reported the same as normal dividends, except with them being named as such.

2 Likes
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So you report another experience. Maybe @donato down the thread did not fill W8-BEN correctly. Thank you.

Regarding IE securities: If they make a distribution but it is PIL, the US should take WHT. But IE securities normally don’t have US WHT. People in the thread assumed that the Swiss tax office could be difficult about that (seeing PILs instead of dividends).

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Maybe or IB did not do it properly in the past. I just double checked: My total dividends (so all of them including PIL) x15% is the exact amount of total withholding tax reported by IB.

I can’t imagine this being an issue, just due to the nature of what’s in my etfs. I paid L2 wht to the US, so the US taxed me here and I have the right to claim that double taxation, when reporting the dividends.

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If, by any chance, you hold some distributing IE ETFs and get some PIL, it would be interesting to know how if it really works so smoothly.

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Sure I can report on that. Just to prevent confusion: you mean international equities or Ireland with IE?

Because I do not hold any ireland etfs and only US etfs (soem with only US securities like AVUS and some with only ex-US like AVDE)

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Ah, yes Ireland. Distrubuting ETFs domiciled in IE. Stuff inside the ETF doesn’t matter. XD

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Ok now it’s all clear :joy:

Then I probabaly won’t be able to help there, I don’t intend to hold IE funds :slight_smile:

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