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Box Spreads and Capital Efficiency

One of my go to strategies is a covered strangle. Simply cash secured puts, long shares, and covered calls. Like the wheel with more CSPs out.

Part of this strategy is having the cash to take assignment as part of the management plan and on larger positions this can be inefficient. Rather than leave the cash sitting, we can use the cash but keep it accessible.

There are different ways to do this, but for this post I’m going to cover box spreads. These are a simple way to gain exposure to the risk free rate at adjustable timeframes. There are tradeoffs between using box spreads vs bonds themselves but I prefer the ease and timeframe flexibility, particularly with the adjustments in rates.

The process is simple:

  1. Establish base trade according to your plan, in this case I have a base position in IWM as part of my covered strange strategy

  2. I like to use SPX for a few reasons: European options are a key safety feature in box spreads to avoid early assignment; Sect 1256 - 60/40 cap gains tax; liquidity; expiration choices; size for efficiency

  3. Time the box spread to correspond with your base trade. It's important to monitor the CSPs as early assignment on that trade is possible and grows in probability the closer we get to expiration and deeper ITM we go. <0.05 on the short put premium is a good metric to monitor. It's not a big deal if we're assigned early, we'll just hold the shares on margin until we flatten the box spread but I look to avoid this nonetheless.

  4. We can buy (loan money) or sell (borrow money) box spreads. I place them to loan the money, so this means I’m long the spread.

  5. To loan money, we buy a call and put spread at the same strikes (example below). The width of the strike is the terminal loan value, the debit paid is the loan amount.

  6. Width of the strikes is your preference based on what you want to loan (or borrow)

  7. As you'd expect, longer term loans (greater DTE) will pay you more but tie the capital up for longer. You can always flatten the position early if you want, however, fees are steep on these trades and can quickly eat into the yield. I accept the slippage to enter and expect to carry the trade to expiration without an early exit.

Example:

  1. I have several tranches of CSPs out in IWM (part of my covered strangle strategy) earliest expiry 24Mar with trades out to 31Mar.

  2. Today (17Mar) I had an AM expiration for (10) 1,000pt box spreads in SPX that offloaded. I reviewed the nature of the CSPs - some are ITM but still little risk of early assignment.

  3. With the Fed statement next week on rates, I didn't want to be tied to a lower rate in the event that they choose to raise. So I re-entered via the trade below that expires next week.

  4. These expire the same day as my nearest tranches of IWM. I intend to roll those positions if they remain ITM, however I can take both to expiration if I want.


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