I’m confused too. Say you sold 10 3200⁄3400 box spread contracts for $196k a while ago, for a “par value” of $20k per box or $200k total. Since the exact box spread you sold is rarely traded, the best bid in the order book will be the sum of the 4 individual leg bids, and likewise the best ask will be the sum of the 4 leg asks. This makes the spread very wide, maybe $15k bid and $25k ask, and I’m not sure how IBKR values your position, maybe it just takes the midpoint. Let’s say it’s normally -$197k at some point in time.
Now say someone buys a 3200⁄3400 box for $25k. I’m guessing that IBKR’s algorithm could see the last traded price, decide your position is worth $-250k now, and liquidate you. If you keep an open order to buy back the box for say $16k each, nothing changes and in fact the midpoint price would increase. Maybe the commenter meant to say you should keep an open order to sell more box spreads for slightly above par value?
Here’s a thread I found with some interesting information (albeit by anonymous Internet commenters :) It ends up, on page 5, with a suggestion similar to yours—open a GTC order to add to (not close) your position, at a price that won’t execute, but isn’t so crazy as to imply a margin violation were your position to be marked there.
Now, I don’t see any harm in putting out there an offer to borrow at negative interest; but it’s still not obvious to me why this truly addresses the risk. Do we need such orders to backstop each individual leg as well as the combo as a whole? Since the IBKR auto-liquidation algorithm is proprietary and evolving over time, there seems to be no way to know for sure.
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One more important info for other IBKR users: Set Liquidate Last is no longer available for legs of a combo in the main Monitor view (it’s grayed out). Support replied to me: On further review the ability to set an individual leg on a combo position to “Set Liquidate Last” is no longer available. I apologize for any confusion this has caused via the information on our website.
Actually though, I found that you can still Set Liquidate Last the long legs by going through the Account Window—Portfolio list instead of the Monitor view. Judging from support’s reply, their programmers probably just forgot to disable the menu item there too, so I wouldn’t believe it.
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After investigating these tail risks, I personally don’t find that CD interest arbitrage provides enough reward for having to carry these small worries in the back of my mind for several years. But the box spread financing is definitely a cool idea to have holstered, just in case a unique opportunity (with more upside) comes along for which I’d need a medium-term bridge loan...like MMM’s impulse purchase, which led me to this article in the first place. Thanks!
I’m confused too. Say you sold 10 3200⁄3400 box spread contracts for $196k a while ago, for a “par value” of $20k per box or $200k total. Since the exact box spread you sold is rarely traded, the best bid in the order book will be the sum of the 4 individual leg bids, and likewise the best ask will be the sum of the 4 leg asks. This makes the spread very wide, maybe $15k bid and $25k ask, and I’m not sure how IBKR values your position, maybe it just takes the midpoint. Let’s say it’s normally -$197k at some point in time.
Now say someone buys a 3200⁄3400 box for $25k. I’m guessing that IBKR’s algorithm could see the last traded price, decide your position is worth $-250k now, and liquidate you. If you keep an open order to buy back the box for say $16k each, nothing changes and in fact the midpoint price would increase. Maybe the commenter meant to say you should keep an open order to sell more box spreads for slightly above par value?
Here’s a thread I found with some interesting information (albeit by anonymous Internet commenters :) It ends up, on page 5, with a suggestion similar to yours—open a GTC order to add to (not close) your position, at a price that won’t execute, but isn’t so crazy as to imply a margin violation were your position to be marked there.
Now, I don’t see any harm in putting out there an offer to borrow at negative interest; but it’s still not obvious to me why this truly addresses the risk. Do we need such orders to backstop each individual leg as well as the combo as a whole? Since the IBKR auto-liquidation algorithm is proprietary and evolving over time, there seems to be no way to know for sure.
--
One more important info for other IBKR users: Set Liquidate Last is no longer available for legs of a combo in the main Monitor view (it’s grayed out). Support replied to me: On further review the ability to set an individual leg on a combo position to “Set Liquidate Last” is no longer available. I apologize for any confusion this has caused via the information on our website.
Actually though, I found that you can still Set Liquidate Last the long legs by going through the Account Window—Portfolio list instead of the Monitor view. Judging from support’s reply, their programmers probably just forgot to disable the menu item there too, so I wouldn’t believe it.
--
After investigating these tail risks, I personally don’t find that CD interest arbitrage provides enough reward for having to carry these small worries in the back of my mind for several years. But the box spread financing is definitely a cool idea to have holstered, just in case a unique opportunity (with more upside) comes along for which I’d need a medium-term bridge loan...like MMM’s impulse purchase, which led me to this article in the first place. Thanks!