Am I understanding correctly that the "interest" you pay is paid at the end when the spread expires? Or is it paid at the beginning?
When your box spread is about to expire and the money needs to be paid back, can you open another box spread and take the proceeds to pay off the old one? And then rinse and repeat.
For those who don't know, Box Spreads allow you to borrow money for a cheaper rate than margin by utilizing options
Posted by UnableFix4224
3 Comments
Neither, you are always paying the interest back everyday
If you are borrowing money, you are selling a box. The “interest paid” is essentially paid throughout the boxes term.
For example, if you sell a $100,000 SPX box that expires 1 year from now, you might only sell it for $95,000 now. It will be worth slowly more throughout the year and eventually at expiration it will be worth the full $100,000. Your “loss” here will be both short term and long term capital gains (SPX is a 1256 contract and will be marked to market as well at the end of the year)
You can close this box and open a new one at any time, you don’t need to wait until expiration.
Box spread is basically a zero-coupon bond. You pay everything (principal + interest) at the expiration date.
You can open more spreads to pay back the old ones, but every time you have to open a bigger one as you have to pay both the original principal as well as the interest. If your positions perform better than the interest paid then you can do it forever and never repay, but if they don’t then you’re just losing money and taking more debt to cover for it. If this goes on for long enough you can be left with little equity in your positions and possible margin calls.