This might be a little challenging and requires some understanding of options. This is a niche strategy that can be used to borrow money or invest short term. It’s called the “box” trade. I have attached two pdfs that will help your understanding. I would like a spread sheet and graph that provides a payoff profile at expiration. Bonus points if you can determine what the implied yield is! We will use SPX Index options as the underlying investments. Reference price on SPX was 3405.25
A) You sell 100 Call contracts of the Oct 16 2020 expiration and 2500 strike at 904.25. . There is a multiplier on these options of 100. So to get the value you take the amount of contracts (100) x the multiplier (100) x the price 904.25 to get 9,042,500 of notional dollars. This is a credit Use the same methodology on next 3
B) You sell 100 Put contracts of the Oct 16 2020 expiration and 3500 strike at 131.60 This is a credit
C) You buy 100 Put Contracts of the Oct 16 2020 expiration 2500 strike at 2.70 This is a debit
D) You Buy 100 Call contracts of the Oct 16 2020 expiration 3500 strike at 34.4 this is a debit
Assuming you did the trades today you would receive the net credit tomorrow 9/17
When the trades expire 10/16 you will owe the money back on next biz day 10/19
The above trade is selling the box---effectively borrowing money
The difference between your net credit (sum of debits and credits) from above received on 9/17 and the value of each leg on the expiration date that you will pay on 10/19 will be the amount of dollars the borrowing cost you…the implied interest rate of that borrow can be determined by the difference in the amounts and the day count .
The value for each option at expiration is determined by the closing price of the index…so if you just assume the 100 contracts of 2500 strike calls you sold (a above) and assume the SPX closed at 3300 the calculation would be closing price 3300 minus the strike price (2500) x 100 contracts x 100 multiplier or 8,000,000. Additionally since this was initially a credit to close out the trade it creates a debit…the net P&L on each trade would be calculated and summed. The sum should be the same no matter what price the SPX closes at on the 4 trades.
Finally we would like to see a graph that shows at expiration the value of the sum of all options
Next we would like to see in a spread sheet the value of each individual leg of the options as well as the sum of all 4 combined versus the corresponding closing price on SPX. (at expiration) Please run SPX at 200 point intervals from 1000 to 4000
I know this might be confusing. See if you can understand and if not set up time to call me. We are looking for how you would be able to process and show the output.
2) Hopefully easier J
a) Assume you buy 15mm of a bond at par with a 4.5% coup at a price of 100
b) Assume we put up 10mm and borrowed 5mm to pay for bond
c) I would like to be able to adjust my cost of borrow…so effectively I am earning 4,50% on 15 mm and paying some cost on 5mm…I would like to be able to change the cost of borrow and then solve for my return which would be the coupon I earn minus the cost of borrow
d) Finally I would like to calculate a “breakeven”….Effectively looking at how much I earn (coupon X15mm – cost of borrow x5mm) for 5yrs…then determine how much the bonds can decline in price for me to have a zero return. So that would be initial trade 15mm minus the 5mm I borrowed minus my net earnings should come up with a value…which would be the price I break even at
Once again happy to discuss. I would like to be able to change the input on the following a) Amount of bonds purchased and coupon rate b) amount of money borrowed and cost of borrow c) time frame of the holding period d) closing price of the bonds