If I create a synthetic long 30 dte, by buying an ATM call and selling an ATM put, I will have spent far less buying power than if I actually long the shares, and therefore I am charged an interest rate for the position for 30 days.
My question is: what interest rate is worked into the cost of that synthetic position? Is it the 30-day Tbill rate? Or is it more like the 30-day SPX Box spread rate? (Because Box spreads often yield higher than Tbills., so if it were the Tbill rate, there would be arbitrage potential here, especially on long-duration bond ETFs.)
Thanks.
Effective Interest Rate on Synthetic Long Positions
byu/Key-Tie2542 inoptions
Posted by Key-Tie2542
2 Comments
Easiest way to answer this question is to price the conversion, and work out what that yield works out to. For ATM and OTM conversions, it will end up looking something like the SPX box yield (maybe a little more). There are a bunch of details regarding different financing spreads for different instrument types in the money markets that make it hard to definitively pin down an answer to your question. But those details are really beyond the scope of what retail traders care about.
Perhaps I’m reading this wrong, but you cannot buy a long option with an expiration of < 9 months on margin. There should be no margin interest for securing the short put either. Combined there should only be the reduction in buying power, what you spent on the long + what’s securing the short.
Your options will be priced with the current risk-free rate, like all options are. What occurs inside a bond ETF, like TLT, is anyone’s guess. It will not outpace actually owning bonds. TLT is responsible for maintaining a product that has a share price, another input for the option pricing model.