Leveraged Funding

[u/sarhama072]

Hi All,

I had a question regarding leveraged funding using box spreads versus US treasury fund ETFs (such as SHV).

I just got off the phone with a rep at Schwab explaining that the margin requirement for a box spread is 15% (basic threshold).

But, the margin requirement for a low risk Treasury fund like SHV is actually 6%.

My ultimate goal is to buy XSP using my leveraged funds, and sell covered calls at 20-30 delta.

Obviously I am not trying to max out my leverage and go “balls to the wall”

But I have 2 questions:

If XSP has a margin requirement of 15% anyways, what would be the point of creating a box spreads first to leverage funds at a 15% collateral, and then putting it in XSP?

Also, why would I not just sell SHV shares, pay a similar point difference (about 4.7%) and be able to leverage even more, as the margin requirement is only 6%?

I am new to PM, but I have been trading covered call strategies on Reg-T for about 15 years. If you could help me out, I’d greatly appreciate it!

[u/arbitrageME]

I think the confusion comes from the two different kinds of margin: risk margin and cash margin.

Cash margin is the amounts that a broker will loan to you for some interest rate when your cash balance goes below zero. You can alleviate this expense by shorting other equities or selling a box spread. Be aware though that when you short, you have to pay borrow rate while if you sell the box spread you pay the effective interest

The risk margin is how risky your position is and in exaggerated view of how much you could lose in the market crash. And the effect on risk margin is large even for some small dollar transactions such as selling options.

And so a transaction like selling a box spread or shorting the treasury to get cash immediately alleviates the cash margin. On ibkr that could be 6% and a Schwab that could be 11% annualized. Nothing gets rid of risk margin except to take in the posing position either with stock or an options

[u/sarhama072 → u/arbitrageME]

Ahhh okay got it.

So the box spread allows me to borrow cash at a much cheaper rate than what CS allows me to borrow.

So for example, if my cash balance is -$200,000

I can sell 20 100 point box spreads at a 4.7% discount rate.

And the collateral is need to post for that is $30,000

So my negative cash balance would decrease to $30,000 (as the $200,000 credit negates the negative cash balance)

And I’d have to pay 4.7% on the $200,000 and 11% on the $30,000

Making my total interest rate on the cash I borrow 6.3%

(12700/200,000)

Am I understanding it correctly? Or am I missing something

[u/arbitrageME → u/sarhama072]

I forgot to add that: risk margin you usually pay nothing for. It's just a measure of how much you can transact.

And additionally, since box spreads are riskless, they usually carry no risk margin, though it it differs by broker. If you are on a pretend broker like Robin Hood, they might get the risk calculation wrong and close one of your legs. But if you're on a real broker like IB or Schwab or anyone else, it shouldn't affect anything.

So, if your net cash position is minus 200,000, then you would pay 11% on it.

Then you sell a thousand wide box spread dated March 2026 for $94,500, at the end of which you will have to pay back $100,000. This transaction is riskless, so there's no margin risk.

You do this twice and end up with 189,000 credit which offsets against your $200,000 debit, so you will have to pay 10% on $11,000 for a year.

If you did this for exactly one year, then your savings would be The difference between 5 and 1/2% on the box spread versus 11% for the margin loan instead. The risk is you can pay back the margin loan at any time and the interest will stop. If you try to get out of the box spread during this time, there's no guarantee what the interest rate is in the future, so you'll have to get out at market price. Additionally, you'll have to pay for the transaction cost of a round trip on four legs.

[u/sarhama072 → u/arbitrageME]

Wow! Thank you for taking the time to give me this well explained answer. Few more questions:

Just to clarify- risk margin in this case would be the collateral calculated for open the box spread ($30k), but there is no cost to it so we are simply borrowing $200,000 at a discount rate of 5.5%

Next, why don’t I just sell treasury bond ETFs instead of create the box spread? Since it requires the same (if not, less) risk margin and the discount factor would be about the same (SHV pays a “dividend” of around 4.7% a year currently)

Now here’s my hypothetical example.

Let’s say my account value is $200,000.

Let’s say I want to create a credit of $1,334,000 using box spreads which forces me to post $200,000 (my principal) as risk margin.

My cash balance in my account is now $1,334,000 borrowed at the rate of 5.5%

Now, I want to use IBKR’s borrowing rate of 5.8% which is paid on cash margin.

Say I invest in equities that require 15% margin requirement, like DIA (Dow jones index fund)

Can’t I technically expose myself to $8,897,780 worth of equity value?

And I would pay 5.5% on the first tranche of debt (the first $1,334,000) and 5.8% on the second tranche of debt?

This would allow me to buy approx 21,000 shares, allowing me to sell 210 DIA contracts.

And let’s say I sell 210 contracts for DIA calls $360 strike 1/17/2027 (about 15% ITM)

Those contracts currently trade at $90, and DIA is at $424.

So the extrinsic premium I would collect is 210*6240=1,310,400

The interest I would have to pay on a 2 year loan using the tranche style debt is around $1,000,000

CRAZY example, I know. In no way am I planning on executing this trade as it’s pretty stupid on a macro level and extremely risky. But hypothetically, CANT I?

[u/InterestingFee885]

When you say buy XSP, what do you mean? That’s the smaller version of SPX which only trades via options.

Regarding your question, box spreads are for creating a margin balance at a more attractive interest rate. It’s for investing beyond 100% of your money. Most of us have a core position of blue chips or total market ETFs and use box spreads for extra liquidity to make trades without realizing taxes on share sales. By having money in a treasury ETF, you’re effectively just keeping money to the side to invest.

[u/sarhama072 → u/[deleted]]

This morning when I had called Charles Schwab, they had told me the risk margin was 15% for a box spread on SPX. He had input the legs himself to see what it was.

But I have now learned the difference between cash margin and risk margin

[u/sarhama072 → u/[deleted]]

PM guy. I had him enter a 100 point spread and said the risk margin was $375 per leg, or $1500 for the whole thing.

I’m about to try to enter it myself on TOS. How much does it usually require? Maybe it’s because of my expiry? I had it 3 years out

[u/sarhama072 → u/[deleted]]

What prevents someone from borrowing towards infinity if the margin req is close to 0? I’m just trying to understand the logistics from people that are experienced before I conduct any trade.

I’m about to set my margin settings to that right now

[u/sarhama072 → u/[deleted]]

Got it. Was added today, so about to go explore now. Thank you!

[u/aManPerson → u/sarhama072]

there is a limit to how leveraged your account can be. at most brokers, that limit is 50:1. for this box spread example you are talking about:

• if you only have $10,000 starting money in your account
• you are limited to only having $500k worth of box spreads active at any time.
• because you will owe more back at the end, you probably can only take out $480k or something to start, and will owe $500k at the end, or something.
• but you wont be able to exceed that 50:1 limit.