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Super Long-Dated SPX options (5 years to expiration)


schmeljones
Posts: 17
Topic starter
(@schmeljones)
Active Member
Joined: 1 year ago

Hey all - hope all of us vol-shorters made it through this week unscathed! Wild ride for sure.

With my cash balance in my account a little lighter than usual mid-day today, I wanted to be in a position to cover a 30 pt ITM assignment without using margin (thankfully all my strikes held). I usually use SPX box spreads for this purpose as the interest rates are better than IBKR's margin rates and there is no floating rate risk. Also the "interest" is a section 1256 loss so its tax deductible. When these short-term loans "mature" I simply pay then off with cash contributions + collected premia.

In doing so today, I found out that CBOE is now offering Dec 2024, 2025, and 2026 options. For the Dec 26 options bid-ask spreads were huge and volume quite thin so I didn't get anything filled, especially as I assume market makers are anticipating large interest rate changes between now and then.

Apparently they are only 1 month old -> https://mondovisione.com/media-and-resources/news/cboe-options-exchange-to-list-three-long-dated-spx-options-expirations-beginnin/

Something to keep an eye on as that market develops. Could be a way to get cheap and relatively simple leverage for those in accumulation phase like me or daring folks in retirement who were convinced by BigERN's last post to "buy, borrow, die".

7 Replies
earlyretirementnow.com
Posts: 294
(@earlyretirementnowcom)
Member
Joined: 6 years ago

Nice, thank you! Yes, noticed that!

It might be useful as a long position because the premium as % of the notional is pretty small. You can hedge the downside for a very small annual premium.

Also interesting would be box spreads for low-cost leverage!

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6 Replies
NavyPack
(@navypack)
Joined: 2 years ago

Estimable Member
Posts: 182

@earlyretirementnowcom for the hedge would you buy a Put that is OOM, say 4200 with 2025 expiration?  That costs around 57k to protect 470k below a 10% drop, which works out to 3% per year.

I do like box spreads, but harder to fill out that far.

 

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earlyretirementnow.com
(@earlyretirementnowcom)
Joined: 6 years ago

Member
Posts: 294

@navypack I could envision buying a Call ATM or a little bit OTM. And then keep the margin cash all in some dividend-paying or tax-free interested funds, like the ones I use to hold the margin cash for my options trading.

Right now, the "yield" for ATM calls expiring in 2026 is "only" a bit above 3% annually. Seems to be cheap insurance to hedge the downside for the next 15 years.

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nobatmanjokes
(@nobatmanjokes)
Joined: 2 years ago

Trusted Member
Posts: 99

@earlyretirementnowcom the Dec 2023  2023, 4700C is around $50k now, and the 2025 call at the same strike is around $75k, and the 2026 is around $80k. It seems that is a really significant savings for a whole extra year of downside protection. In practice do you think that orders would actually fill at those rates? My guess would be that you’d end up at 4% pa due to slippage, still better than the 5-6% pa for the 2023 LEAPS. Has anyone filled on these new options that can comment on how much slippage to expect?

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earlyretirementnow.com
(@earlyretirementnowcom)
Joined: 6 years ago

Member
Posts: 294

@nobatmanjokes Yeah, I'm troubled about the big B/A spreads. I hope the 2024-2026 expirations will grow in popularity and the spreads will narrow. Until then, carefully placed limit orders would be the only way to go.

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schmeljones
(@schmeljones)
Joined: 1 year ago

Active Member
Posts: 17

@nobatmanjokes I've never tried to set orders on any of those new long-dated SPX options but if you do, I'd be very interested to hear what you get them filled at.

Have you worked extensively with buying Call LEAPS ATM? I'm considering implementing a strategy there with new contributions. The downside protection plus the tax benefit from exercising appreciated calls seems to have some appeal especially for those above the 0% capital gains bracket.

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nobatmanjokes
(@nobatmanjokes)
Joined: 2 years ago

Trusted Member
Posts: 99

@schmeljones I haven’t bought any yet. I was looking into it right around the time you posted this thread, but ended up taking my leverage higher on the put write side instead for now. I was looking for an XSP amount of leverage to cover cash flow for some lumpy expenses. The ~5% pa rate was too high for me, and I didn’t see XSP on the long dates yet where the lower rates are found. Decided it would be better to just trade at slightly higher leverage on the put writing (still safe margin levels!).

I would revisit this choice if VIX1Y came back down below 20, if XSP were available out 5 years, or if I needed SPX levels of leverage. I’d also consider the box spread/long equity combination for its long term tax efficiency.

 

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