This financial “gem” has been discussed on Bogleheads for some time, and I thought I would share this here, after having done a few trades myself.
The following gives a good description of how it works:
Basically, a box spread trade allows you to take a loan with a fixed maturity date (loan is automatically closed when the options expire) and pre-determined interest rate. It is like you have issued a zero-coupon bond to a third party and will pay back the par value when the options mature. E.g. you get a credit of $19,900 now and pay back $20,000 8 months later.
What are the rates and terms?
A fellow Boglehead has created a webpage that tracks box spread trades on SPX. You can see the past trades, showing the rate and terms:
Some recent trades are
2-mo loan 0.3%
5-mo loan 0.55%
8-mo loan 0.75%
11-mo loan 0.8%
23-mo loan 1.4%
35-mo loan 1.8%
The rates you can get varies day-to-day. You basically submit an order and wait for someone to bite. It could take a few days to get the best rates, but if you need the loan fast, you can submit a higher rate and be done quickly.
Where can I do these trades?
I have opened box spread trades at Etrade and Fidelity without issues. Other people have reported success at Interactive Brokers and TDA.
What type of account is needed?
You will need a brokerage account with margin enabled and lots of equity available. The regular Reg. T margin works, but an account with Portfolio Margin can give you a larger loan. You will also need to be approved for options trading.
What happens when the options expire?
On the date of options expiry, you will have to pay off the loan ($20,000 in the above example). If you have not deposited cash by this date, your account will start to incur margin interest (which generally is at a much higher rate, so don’t let this happen!).
Your loan interest ($100 in the example) can be claimed as a capital loss in your tax return.
Instead of borrowing, can I lend out money?
Yes, if you do the opposite trade, you are lending out money and earning interest. It would be like you are buying zero-coupon bonds (you lend out $19,900 now and get $20,000 8 months later).
Why do this instead of a margin loan?
For one, the interest rate is lower. And secondly, the interest rate for this is a fixed predetermined rate from the start. Margin loan interest rates are generally variable, and will increase when the Feds increase rates.