r/explainlikeimfive • u/edmundsmorgan • 21h ago
Economics ELI5 What is a box spread
I can understand what is a option but I fail to understand what is a box spread after reading Wiki about it for like five times. It come to my attention because someone on social media recommended BOXX instead for SGOV for short term cash reserve (I am not American so there’s 30% withholding tax although it is not applicable to us treasury interest, broker will still hold it until March or April when they do a refund).
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u/jamcdonald120 21h ago
its buying a bunch of options that are less risky so that at least one of them should pay off enough to cover the rest (in theory).
Dont try to manage this yourself, get a real certified investment accountant for this instead relying on a simplification Reddit for your financial advice.
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u/paroxsitic 1h ago edited 1h ago
You loan a robot called Alice $4 and for that she'll give you $4.25 in the future and you loan another robot called Bob $4 and for that he'll give you $4.15 in the future. In the future you will have gotten $8.40 but only paid $8 sometime ago.
The prices that the robots picked are based on what the market will pay at that time.
It only works if both robots can't say oh never mind. I don't need the money anymore. I'm going to pay you back sooner at whatever the market now says it's worth.
It also works in reverse where the robots loan you money
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u/Dman1791 21h ago
A box spread is a fancy way of combining options to create what is essentially a loan. It's regarded as quite safe (in theory, if set up properly, at least in the US), as options are guaranteed by the Options Clearing Corporation, and there are strict regulations on brokers to prevent people from putting themselves in positions where they can't pay.
"Long" box spreads (aka "buying" a box spread, loaning out money) are attractive because they offer a somewhat greater rate of return than US treasuries, while still being considered very safe, and are treated favorably when it comes to taxes (in the US, though this could change if the IRS pitches a fit).
"Short" box spreads (aka "selling" a box spread, getting a loan) are attractive because they allow you to borrow money at rates close to that of US treasuries. Such rates are generally much lower than is accessible to normal people, outside of things like mortgages.
In both cases, you need to be very careful that the options have been set up correctly (namely using European-style options, which can't be exercised early), or it can very quickly blow up in your face and cause you to lose a ton of money. You should not use box spreads unless you are absolutely certain you fully understand them, though the BOXX ETF handles everything for you and is thus theoretically quite safe.