SPX box spreads
What are the liquidation risks?
The portfolio is the collateral. If it falls far enough relative to the amount borrowed, securities can be sold to reduce the loan. That sale is not optional once the line in the agreement is crossed.
Key takeaway
Liquidation risk is the chance the collateral is sold because the loan is too large for what remains. An SPX box does not create that risk by delivering stock. SPX and SPXW options are cash-settled.
1. Collateral falls, and the loan does not.
2. Loan-to-value crosses the line in the agreement.
3. Securities are sold to bring the loan back down.
What the box does not do
The four SPX legs pay or receive cash. They do not deliver shares of the companies in the portfolio. Delivery risk and liquidation risk are different things. Liquidation risk sits in the collateral account.
What this means
Borrowing avoids a sale today. It does not retire the possibility of a sale later. The later sale happens because the collateral rules failed, and it can realize a gain. The threshold that triggers it is the one in the account agreement.
Related
How much can I borrow?How does this compare with brokerage margin?Alternatives to a Margin LoanHaven SPX Box RateFinancing simulator
Haven Funding LLC is owned by Haven Systems LLC. Neither firm is a bank or a registered broker-dealer. Securities and execution services are provided through Interactive Brokers LLC. The Haven SPX Box Rate is a constant-maturity reference rate. It is not a Truth in Lending APR and not a commitment to lend.