Box spread trades as cheap loans

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.


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Yeah I know people started using this to avoid paying higher margin rates to their brokers. I haven’t done it myself, but my understanding of the trade offs and comparisons vs margin loans are -

  • margin loans are floating rate and very low rate since they’re very short term, while box spreads are fixed for the term to maturity of the options. Longer term guaranteed rates cost somewhat more.

  • margin loans incur no commissions to set up, nor to close early, so you can only pay for exactly what you use. Here if you want to end your box spread before the end of the options maturity, you have to pay commissions and spreads again to exit the position. This raises the cost for flexibility but perhaps not much if your trading costs are low

  • yes rates are rising, but presumably those will rise for box spreads too (as reflected in the term structure you see with shorter term boxes being cheaper rates than longer term ones). You could use this to lock in a medium term financing rate, but that would be a bet on rates rising faster than expected (presumably you could make a lot in the treasuries or rates markets if you were sure of this).

  • more active borrowers can negotiate margin rates with their brokers and get competitive margin rates. For example, here’s Interactive Brokers margin schedule, which doesn’t require negotiation.

USD 0 ≤ 100,000 1.58% (BM + 1.5%)
100,000 ≤ 1,000,000 1.08% (BM + 1%)
1,000,000 ≤ 50,000,000 0.83% (BM + 0.75%)

So if you’re borrowing well over $100k, the average starts coming down but IB’s rates are tiered so you pay more for the first $100k. Other brokers are less competitive but you can often negotiate low rates if you’re borrowing larger sums.

  • Here you can see how Fed funds rates are expected to rise based on the futures markets view of upcoming possible rate hikes (click the “probability” option on the left)

I know IB made changes to their tiers and spreads so that they will be charging more than before once interest rates start to rise. For now they’re the same, but it’s harder to qualify for the best rates now as of 2022. They used to have a $1-3M tier that was the $1-50M now, and over $3M you got the next best rate which was Fed+0.5%, min 0.75% annually.

Are those box spread rates you quote annualized interest rate or the fixed amount of interest paid for the duration of the spread?

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Yes, IB offers the best published margin loan rates in the industry. I actually don’t like the IB interface and moved my investments out from them years ago.

I do have a negotiated margin rate of 1.5% at Etrade. But I still prefer the stability of the “fixed rate” box spread loans. The sample rates I cited in the OP are annual rates. As for commissions, it is less than $5 at Etrade and less than $3 at Fidelity per box spread trade. This is very small compared to loan sizes of several tens of thousands.

When I took the loans, I intend to hold them to maturity. I don’t plan on closing any box early.


For the uninitiated, what is the meaning of these terms?

I’m guessing the only downside is that you must satisfy some margin requirement (i.e., the assets in the account must not fall below some percentage of the “borrowed” money), and the terms above describe exactly what that is, right?

Also… is there a limit to how far in the future the options can mature? Could one borrow for 30-yrs fixed at below the mortgage rates, or is 3 years the limit? :rofl:

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To put it simply, portfolio margin lets you borrow (leverage) more compared to Reg. T margin. The other way of looking at it is that your equity is allowed to fall further before you get a margin call with portfolio margin.

Here is one comparison between the two

Right now, the furthest option expiry is Dec 2026. The far options are however usually less traded and harder to fill.


So with Reg T if I wanted to borrow $100K, I’d need to have at least $50K in the account to make the trade, but only keep $25K until maturity/payoff, right? And with a Portfolio Margin as long as I have and keep $100K in the account I could borrow ~$666.67K? The link says “Margin can range from 8% for ETFs to 15% for equities” and I’m guessing options count as equities for this purpose…

No, that doesn’t look correct. The important thing to remember is that you can never get more money out from the brokerage than the money (or the equity value) you put in.

Suppose if you put $100k worth of equities in the brokerage, to the first order approximation, the most you can get out would be $75k in cash (assuming a 25% margin requirement). If the margin requirement for portfolio margin is 8%, I guess you can withdraw up to $92k in cash.

But these numbers are the extreme (maximum) value. A small fall in equity value would immediately result in a margin call.

If you are looking to get a loan that is more than the value of the equities in the brokerage account, box trade loans ain’t it. The only reason you can get a box trade loan is because the loan you take out is secured by and less than the value of the equities in the account.

Can retirement funds count towards the equity value? If so, I would absolutely be interested in figuring out how I can take out 1% box spread trades up to 75% of my retirement equity.

What are you trying to do? Retirement accounts are pretty restricted in what you can do, especially when it comes to withdrawals and loans. If what you want is a permanent withdrawal without early age penalties, look into 72t withdrawals on a regular schedule.

Just interested in putting the margin funds it into Voyager and getting a guaranteed 9% and paying back 1%. Reminiscent of the days of 5% CDs and 0% credit card intro rates. I don’t want to make any withdrawals from my retirement account.

I don’t have non retirement equities, so unless retirement funds count, these box trades are useless to me because I would be better off with the non-retirement equity I have right now (which is cash) staying in Voyager.

Just looked it up on TDAmeritrade. No dice.


If anyone has any other ideas about how to work out my strategy, let me know!

If you have limited assets in taxable, more assets in a retirement account, and wish to make a taxable only investment, generally your choices are to

  • take a premature withdrawal (with taxes/penalties, expensive and irreversible)
  • start a 72t periodic withdrawal plan (less cash up front, hard to stop)
  • move your IRA to a 401k and take a 401k loan (limit $50k)

Other less direct methods might include

  • divert all your savings to taxable and cease retirement contributions to build up taxable cash
  • borrow from credit cards or similar low rate loans to fund the investment
  • set up a self directed IRA to loan your retirement funds to a friend to do this investment (due to self dealing, not doing it yourself) and earn most of it less a fee for them

I’m not sure I’d want to be an unsecured creditor of some crypto startup for whatever they’re paying, but if you think you can cash out fast enough and keep your exposure low, I wish you good luck. I don’t think you can call anything in the crypto space “guaranteed” though.

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I have no desire to pull money out of my retirement accounts. I was just curious if I could count it for purposes of the equity needed for these margin requirements. Looks like that’s not the case.

I was wondering if anyone had any suggestions on how to get equities in an IRA to count (like a brokerage that would count it that I could transfer to) not how to pull it out.

Voyager isn’t what I would consider a “startup”

I did have a chunk of cash at a startup that was paying 15% (stablegains), but decided that extra 6% wasn’t worth the risk of going with an unknown entity, pulled it out, and decided Voyager was much more likely not to disappear with my cash. I don’t expect the 9% rate to last, but I’ll take it while I can get it. By “guaranteed,” I just meant its a stablecoin paying a fixed rate and not a fluctuating investment that gains and loses value.

After googling around, I found that you can have certain types of option trading in IRAs, but I’m not sure if box spread trades are allowed.

I’m not interested in option trading in my IRA. I was just curious if I could use my IRA balance toward a margin account where I did the box spread trade in a non-retirement account.

Isn’t this something that professionals mostly used? Like options floor traders (back when there was a floor) who got attractive risk-based margin, and used it to finance other securities positions? Either buying the box to invest, or selling the box to borrow? I sort of recall the SPX being ideal since it was euro settlement so an early assignment wouldn’t blow the spread up.

You couldn’t actually do a 500k notional box in the SPX or whatever and actually walk with the proceeds to buy a house or something? Doesn’t the money more or less have to stay?

I sort of recall IB pushing the single stock futures as an implied financing method a while back. Either short stock and long futures, or long stock and short futures. They even had an order type where you could trade stock for future or vice versa in a single click, and the implied rate was pretty close to whatever the risk free rate embedded in the derivatives pricing.

I could imagine a big bank, who has essentially unlimited credit with its counterparties doing this sort of stuff. I know it happens with repos in treasuries, although the details are a mystery to me,

Interesting thread. Thanks!

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Sure, you can take out the money. It is a margin account and you can withdraw the credit from the box spread trade (obviously you need to satisfy the maintenance margin requirement). There won’t be any margin interest charged for your withdrawal. Just be prepared to bring the money back on the options maturity date to avoid margin interest.

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FYI, some might find this article (and comments) informative.

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Discussion of buying the box as a short term cash investment. ~1% apr. Essentially doing it in reverse of what we’re talking about in this thread.