Box Spread Loans

*Note: ZEGA Investments does not provide tax advice. Individuals should consult their tax advisor. Tax laws or interpretations of tax laws may change. The “interest rate” on Box Spread Loans is subject to market conditions and examples do not include any fees, commissions, or trading costs. Margin requirements at the discretion of the investor’s custodian who may use their standard margin requirements, special requirements on certain securities or concentrated accounts, and are subject to change. Some investors may be able to access a higher borrowing rate using “portfolio margin”. Portfolio margin minimums and borrowing power is subject to the custodians and not all advisory firms may allow even if allowed by the custodians.2 Hedges and/or collars may help to protect underlying capital. Does not include any fees, commissions, or trading costs.

Information presented does not involve the rendering of personalized investment advice, but is limited to the dissemination of general information on products and services. This information should not be construed as an offer to buy or sell, or a solicitation of any offer to buy or sell the securities mentioned herein.

All investment strategies have the potential for profit or loss. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client's portfolio. There are no assurances that a portfolio will match or outperform any particular benchmark. Profit & Loss graphs presented are hypothetical only. See slide footnotes for all relevant assumptions and limitations.

ZEGA Investments claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. ZEGA has not been independently verified.

Hypothetical results do not reflect how ZEGA may actually react when managing to live economic or market events.

Interest Rate and Liquidity Risk: Box spreads used in the Short Box Spread Synthetic Loan strategy have a fixed payoff (loss) at a future date, making them economically like zero-coupon bonds. A short box spread consists 4 options legs with a short put spread and a short call spread that utilizes the same set of strike prices and expiration dates. The short box spread has a fixed expected cost where the investor expects to lose the synthetic interest paid to borrow funds and is known at the outset through expiration date.

The value of the short box spread used in the strategy is subject to interest rate risks meaning that its mark-to-market value may fluctuate as interest rates and broader market conditions change. While the final payoff (loss) of the short box spread is fixed, interim valuations can move in response to shifts in rates. The ability to purchase or sell box spreads effectively is dependent on the availability and willingness of other market participants to transact in box spreads at competitive prices. Individual option positions that comprise a box spread should not be modified or closed separately prior to the option contract's expiration, as the box spread may no longer effectively eliminate risk tied to underlying reference asset's price movement and the return and characteristics related to the box spread will change, and the payoff amount owed by the investor may be different than the fixed payoff at the original expiration date. Market Risk: The amount of net premium, early repayment amount (if applicable), borrowing rate, and duration available will differ in future market conditions and there is no guarantee that the same terms will be available to any investor seeking to utilize this strategy.

Margin and Repayment Risk: Short box spreads require margin approval and may require significant collateral. If the value of an investor's collateral account falls below the minimum maintenance requirements set by the custodian, a margin call will be issued by the custodian, requiring the investor to deposit additional cash or acceptable collateral to maintain the options trade. Failure to maintain adequate margin may result in the custodian’s issuing a margin call or sale of some or all securities in the investor's collateral account (securities unrelated to the options positions maintained as part of the strategy) to protect the options positions. Such liquidations may occur at unfavorable prices, resulting in potential losses and adverse tax consequences for the investor.

Investors must maintain margin in the account at all times to sufficiently collateralize the options positions. Margin amounts are determined by the custodian and must be monitored by the advisor to the account. In addition, at the time of expiration or early repayment, the investor's options account must have sufficient cash to cover the repayment amount. Failure to maintain sufficient funds in the account when repayment obligations are due will result in the account having a liability, which the investor is still legally obligated to repay, and will accrue margin interest at the custodian's margin rates, which are subject to change. ZEGA Investments will have no responsibility to monitor margin requirements or repayment amounts for any account and will have no responsibility for any losses to accounts caused by inadequate maintenance of margin or repayment amounts in investor accounts. If an investor chooses to extend the financing at the expiration date by rolling the short box spread over to a new term, the investor will be subject to different terms (including with respect to margin requirements) based on market conditions and the option contracts available at that time.

Trading Risk: There is no guarantee that ZEGA Investments will be able to execute a box spread transaction on any given day or at anticipated pricing levels. Market conditions, including volatility, liquidity constraints, or changes in interest rates, may prevent execution or result in execution at less favorable prices. Trading may be delayed, suspended, or otherwise restricted due to exchange-imposed halts, order imbalances, or operational issues. In certain market environments, it may not be possible to establish, adjust, or close a box spread position without incurring significant costs or losses.

Tax Risk: Box spread trades on S&P 500 index options (SPX) are generally treated as Section 1256 contracts under the Internal Revenue Code. Section 1256 contracts are marked-to-market at year end (e.g., treat them as if they were sold at year end even if they are still being held), and gains or losses are treated as 60% long-term and 40% short-term capital gains or losses, regardless of holding period. The tax treatment of options strategies can be complex. Outcomes depend on the investor's overall tax situation, other trading activity, other assets held and potential application of rules such as straddle provisions. Advisors and investors must consult their own tax professionals to determine actual tax consequences of the transaction.

A box spread is an options trading strategy that combines a long call and short put at one strike price with a short call and long put at a different strike price. Investors receive cash upfront by collecting the net premium from the option positions. At maturity, the investor owes a higher cash value inclusive of accrued interest. The strategy involves determining the combination of options designed to provide the amount of cash upfront desired by the investor and the desired timeframe for repayment. The resulting payoff resembles a fixed-income investment. Box spreads have historically provided institutional investors with an efficient alternative market to borrow and/or lend. However, although a short box spread may resemble a borrowing transaction, it is not a loan, and investors do not benefit from traditional lending protections such as negotiated repayment terms, collateral arrangements, or regulatory safeguards that typically apply to consumer or securities-based lending.

Any implied rates of borrowing provided by ZEGA Investments prior to execution are illustrative and subject to market changes. Any rate shown is for informational purposes and does not represent actual performance, should not be interpreted as an indication of actual performance and is not a guarantee of future results. The actual borrow amount is subject to the custodian’s margin requirements and may be higher or lower depending on the makeup of the portfolio, the size of option contracts, and current market conditions. 

Straddles: The short box spread transaction may result in adverse tax consequences to the investor if the investor holds positions that are “offsetting” to either the puts or calls that comprise the short box spread. These adverse tax consequences include the recognition of gross gain on components of the short box spread transaction without the benefit of the losses on other components of the transaction and the resetting of holding period on other assets held by the investor. Offsetting positions held by an investor involving certain derivative instruments, such as options, as well as the investor’s long and short positions in portfolio securities, may be considered to constitute “straddles” for U.S. federal income tax purposes. In general, straddles are subject to certain rules that may affect the amount, character and timing of the investor’s gains and losses with respect to the straddle positions by requiring, among other things, that: any loss realized on the disposition of one position of a straddle may not be recognized to the extent that there are unrealized gains with respect to the other positions in the straddle; the applicable holding period in straddle positions may be reset if the position has not attained a long-term holding period and does not begin until the straddle no longer exists (possibly resulting in a gain being treated as short-term rather than as long-term capital gain); the losses recognized with respect to certain straddle positions that are part of a mixed straddle and are non-Section 1256 Contracts be treated as 60% long-term and 40% short-term capital loss; losses recognized with respect to certain straddle positions that would otherwise constitute short-term capital losses be treated as long-term capital losses; and the deduction of interest and carrying charges attributable to certain straddle positions may be deferred.

Investors should consult their own tax advisor to discuss their individual situation

Hypothetical implied borrowing short box spread loan cost shown are for illustrative purposes only and are subject to change based on current interest rate environments