Short letter today. Got to catch a flight!
Last week, we discussed the recent response to the bank issues cutting risks for the S&P 500 (INDEX: SPX). Volatility and correlations fell as time passed, and this helped contain the market. Though last week’s options expiration (OpEx) may free markets up, we maintain that the SPX may stay contained longer before it weakens.
Catalysts for weakness include falling earnings growth and a debt-ceiling crisis that’s driven T-bill yields lower from surging demand; a failure by Congress to raise the limit on how much the government can borrow may disrupt funding markets, WSJ reports.
Let’s limit our expectations and focus on low- or zero-cost call structures (e.g., bull call ratio) monetized to finance longer-dated put structures (e.g., bear put vertical) while allocating a chunk of our portfolio to near-risk-free yield-harvesting structures (e.g., box spread), mainly if you are a portfolio margin trader.
As I explained to a subscriber over the weekend, for boxes, the greatest possible loss across a range of prices is negligible. Hence, buying power is unaffected in trading a box. Consequently, using portfolio margin and trading boxes, you have more buying power to allocate to other trades that are margin (and not debit) intensive, such as synthetic long stock (i.e., purchase ATM call and sell ATM put). Using options, among other derivatives, enables us to stack returns on each other.
Here’s one example.
We can trade box spreads expiring at the end of June. We buy the $4,000/$5,000 call spread for $22,365.00 and simultaneously buy the $5,000/$4,000 put spread for $76,620. This trade costs $98,985.00, and by lending this amount (on April 21, 2023), you will receive $1,015.00 upon maturity. Yes, you will have $99,000.00 cash tied up, but you should be able to use $99,000.00 in buying power in other trades if you have that portfolio margin component which is so important.
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