This is something new to me even though I know itself isn't inherently new. I've been reading on it here and there and getting bits and pieces but my mind doesn't work too well with parts of the whole, I kind of need the entire picture laid out.
From my limited understanding this is just something people with either a decent or a lot of money use at a small acceptable loss as a write off to cover their actual gains. Is that about right? There is no actual gains from the box spread itself? I'm sorry, just trying to learn even if it's not something I use myself. It's always good to learn something new. And my wording might be off.
trying to understand box spreads
byu/Extension_Plum884 ininvesting
Posted by Extension_Plum884
3 Comments
> From my limited understanding this is just something people with either a decent or a lot of money use at a small acceptable loss as a write off to cover their actual gains. Is that about right?
No. None of that is correct.
Box spreads produce a consistent low gain with yields comparable to treasury yields. This is due to the fact that options include in the pricing the current “cost of money” that is short term lending rates. They have advantages in that they may be more tax efficient and you can delay some or all of the taxes until expiration. BOXX for example is an ETF which produces a “yield” using boxx spreads. As you can see it produces a gain roughly comparable to SGOV (90 day tbill).
https://testfol.io/?s=5A22I0OflXX
Nobody would even intentionally creates losses to offset gains to reduces taxes. That would be like demanding your boss give you a 50% paycut because less income means less income taxes. Sometimes there is a strategy of locking in losses (tax loss harvesting) to offset gains but that using a loss which would exist either way not intentionally setting up a strategy to lose money.
A box spread gives you risk-free gains comparable but not necessarily identical to the risk-free rate (you can actually take either side, effectively lending or borrowing). The box spread creates an “implied interest rate” (based on the price and hence IV of the options you’re buying), which can be more or less than the actual market interest rate. The spread arbitrages them. And as anyone who’s been on Reddit for a while knows, you only do it with European-style options.
The main purpose of a box spread is to create a synthetic loan or bond. Investopedia has a good article on it.
[https://www.investopedia.com/terms/b/boxspread.asp](https://www.investopedia.com/terms/b/boxspread.asp)
I have some of my “liquid assets” or “cash” invested in BOXX. So far, it’s working out great. BOXX goes up in value rather than disburse interest from bonds such as SGOV or VBIL. I am patiently waiting for the fallout from any tax issues.