Long-Dated Box Spreads: A Better Way to Buy a Home

Guest Author: Joseph Wang, Cofounder, SyntheticFi

Summary: Box Spreads can beat mortgages on interest rates. Plus, they require $0 down.

Real estate is often a client’s largest purchase. With mortgage rates high, clients may consider alternative financing tools like long-dated Box Spreads - an exchange-traded options strategy that allows securities-backed borrowing at near-Treasury interest rates, while requiring zero cash down. Clients save money on interest rates, capitalize on additional interest deductions, and avoid liquidating assets.

^{This article, including any examples or scenarios provided, is for educational purposes only and should not be construed as investment, financial, or tax advice.}

What’s wrong with a traditional mortgage?

Mortgage is not the most cost-efficient way to buy a home, especially considering the high interest rates and limited tax deductibility.

Consider a hypothetical example: Tony is eyeing a $2MM property in DC. With a $3MM portfolio, how could he best finance his purchase?

Traditionally, Tony would pay 20% down by selling $400K of his portfolio and take out a $1.6MM mortgage. This is suboptimal - he would face significant tax consequences, lose the upside potential of his investments, and pay for a ~7%¹ mortgage.

Box Spreads, especially longer-dated ones, offer an appealing alternative. Tony can borrow money at near-benchmark rates by selling a Box Spread. Using a 5-year Box Spread, he can secure a tax-deductible 4.6% fixed rate for 5 years. Even better, he can keep his full $3MM portfolio invested and working for him. Together, the Box Spread strategy combined with the jumbo mortgage would save Tony over $200K in five years. Amazing!

So, what is this magical 'Box Spread'?

Box Spreads Basics: Advisors Can Bring Institutional Borrowing Strategy to Retail

Box Spreads have been used as a financing tool by hedge funds, family offices, market makers, and other prop shops for decades. In 2024, the average daily notional volume on the SPX Box Spread was over $900MM, making the Box Spread a liquid alternative funding source. The concept behind using Box Spreads as loans is pretty simple:

^{A loan is a contract of fixed cash flows. Receive principal, pay principal plus interest. We can mimic that exactly with options - especially, box spreads.}

Indeed, by combining the two positions below, Box Spreads’ final payoff is fixed at expiration. Cboe offers SPX index options with up to 5-year expiry, which we will use as an example:

^{Source: SyntheticFi}

When the synthetic long and short illustrated above are combined, you end up with a guaranteed payout. Why? Intuitively, imagine buying (longing) Apple stock (AAPL) at price K2 and selling (shorting) the same AAPL at a different price K1; the payoff will only be determined by the difference in the buying and selling prices, K2 - K1, regardless of how Apple moves. The same idea applies to SPX, creating a fixed payout equal to the difference between the two strikes, K2 - K1.

^{Source: SyntheticFi}

The only question left is how much premium is received upfront. This upfront premium acts as the loan principal and is set by the liquid Box Spread market. Since Box Spreads use European-style options, early assignment risk is eliminated, ensuring a fixed final payoff - a debit - at expiration. Because the final payout is predetermined, the implied interest rate - derived from the upfront premium - aligns with the base Fed Funds rate, as reflected in market pricing.

^{Source: SyntheticFi}

Recent increases in trading volume of longer-dated Box Spreads, particularly those with three-year and five-year expiries, have made them appealing alternatives to mortgages. The implied interest rates on Box Spreads are often just 30-50 bps higher than three- and five-year Treasury yields, remaining below 5% - a significant improvement over today's 7%+ 5/1 ARM mortgage rates.

^{Source: SyntheticFi}

In practice, to withdraw this upfront premium, clients need sufficient collateral in their brokerage account holding the Box Spread. What qualifies as "sufficient" is determined by their custodian’s margin requirements. Under Reg T margin, a $1MM portfolio of stocks and ETFs can typically support a $500K withdrawal.

Using Box Spread to Buy a House: 30% Rate Discount + Interest Tax Deductible + No Need to Sell Investments

Benefit 1: ~30% rate discount compared to a jumbo mortgage.

Trading Box Spread on a listed exchange like Cboe provides price transparency and liquidity offered by a multilateral market, avoiding interest surcharges from custodial banks. As a result, Box Spread offers ultra-competitive interest rates, often just 20 bps above benchmark rates.

For Tony, compared to a 7% jumbo mortgage, he would secure a ~4.6% rate through Box Spreads - about 30 bps above the five-year Treasury Bill rate.

Benefit 2: uncapped interest deduction as capital losses²

Instead of cash paid to a bank, the “interest” on a Box Spread appears as a loss on the options trade. This makes the “interest” fully tax-deductible as a capital loss.

“Fully” here means there is no cap. For comparison, mortgage interest is only deductible on the first $750K principal of qualified home loan debt - any interest paid on mortgages for principal exceeding $750K is not tax-deductible. In contrast, the “interest” on Box Spreads is fully deductible with no limit.

Under IRS Section 1256, box spreads on SPX options are subject to mark-to-market taxation at year-end. The accrued “interest” is deducted annually, even though the trade settles at expiration (e.g., in 5 years). These deductions follow the IRS Sec. 1256, with 60% treated as a long-term capital loss and 40% as a short-term capital loss.

Now, back to our hypothetical example.

Tony realizes he can stack two deductions to maximize tax efficiency:

1. Mortgage Interest Deduction - He takes out a $750K 5/1 ARM at 7.0% APR, ensuring he qualifies for the mortgage interest deduction up to the IRS limit.
2. Box Spread Deduction - For the remaining $1.25MM, Tony takes out a synthetic loan at 4.6%, generating an annual capital loss deduction.

^{Source: SyntheticFi}

By stacking the two deductions, Tony’s effective blended financing rate drops to 3.63%³ after tax - more than 2.45% lower than an after-tax 5/1 ARM, translating to ~$49K in annual savings.

Benefit 3: no need to sell for a down payment = fully invested + no capital gains.

Using Box Spreads to finance real estate eliminates the need to sell assets for a down payment. This allows clients to stay fully invested without incurring a large capital gains tax.

This has been particularly valuable in recent years, as a well-diversified portfolio has gained over 80% since 2020. By remaining fully invested, clients avoid unnecessary tax liabilities while continuing to participate in the bull market.

In our hypothetical example, Tony finds this especially useful, as his TSLA shares have risen over 10x. By deferring capital gains just on his holdings, he is delaying $35K in taxes - a big win!

Qualification: liquid investments required as collaterals.

Margin is required to withdraw the premium generated by Box Spreads. The exact requirement varies between Reg T margin accounts and Portfolio Margin accounts.

Under Reg T margin, which typically allows a 50% margin release, Tony’s $1.25MM Box Spread requires at least a $2.5MM portfolio as collateral. Fortunately, he has this covered.

Clients with Portfolio Margin accounts may qualify for higher release rates. Portfolio Margin is a newer margin program that is available at many brokerage platforms, such as Charles Schwab. Unlike Reg T margin, which applies a fixed release percentage to each position, Portfolio Margin assesses overall portfolio risk. A well-balanced or hedged portfolio can significantly benefit from Portfolio Margin, often increasing the margin release to 85%.

Risks: hedged, controlled, but non-zero.

Let’s get one thing out of the way: the Box Spread itself introduces minimal risk to clients. The trade is guaranteed by the Options Clearing Corporation (OCC), which holds an AA rating and is designated as a Systemically Important Financial Market Utility (SIFMU). The OCC successfully cleared trades through both the 1987 crash and the 2008 Global Financial Crisis without failure.

That said, there are two key risks clients need to be aware of:

Margin Call Risk: Similar to a traditional margin loan or SBLOC, Box Spread synthetic loans require ongoing margin to cover potential market fluctuations. Margin call risk arises if the market drops significantly.

Mitigation: If a client borrows the maximum 50% of their portfolio under Reg T margin for stocks and ETFs, a margin call can be prevented if their portfolio declines by less than 28.5%⁴+.

In the hypothetical example, Tony is borrowing $1.25MM, or 41.67% against his $3MM portfolio. His portfolio can fall by ~40% without triggering a margin call; that is, his 3MM can dip to ~$1.8MM without triggering a margin call.

For additional protection, there are potential risk mitigating strategies that may be considered. Two popular strategies⁵ are:

One, use a HELOC as a backup. A Home Equity Line of Credit (HELOC) can be secured against the portion of home equity paid with Box Spreads. HELOCs typically carry an interest rate of Prime +1% (currently 8.5%). In the event of a margin call, the client may temporarily tap into their HELOC to meet the margin requirement, avoiding a forced sale of their portfolio.

Two, reduce the borrowing percentage. For example, borrowing only 30% of the portfolio would allow the client to withstand a market decline of over 60% without a margin call, sufficient to endure all major crashes since the Great Depression.

Refinancing Risk: Longer-dated Box Spreads lock in an expiration far into the future. If a client wishes to refinance before expiration, the box spread must be offloaded. This introduces interest rate differential risk - the cost of closing the position will depend on the difference between the original locked rate and prevailing market rates at the time of refinancing.

Mitigation: For clients who anticipate making early repayments, a “laddered” approach, similar to a bond ladder, may offer risk mitigation. For example, a ladder of Box Spreads, with expirations ranging from one to five years, each 20% of the total loan value, enables a 20% annual paydown.

About the Author

Yezhou "Joseph" Wang, Cofounder, SyntheticFi.

Joseph Wang built products closely with financial advisors as the 1st employee at VRGL, a 100MM+ series A advisor-tech startup, after graduating with degrees in finance, statistics, and computer science at the Wharton School of the University of Pennsylvania. His previous experience on Deutsche Bank’s rates desk, hedge funds, and a family office inspired him to build SyntheticFi and democratize the Box Spread strategy through financial advisors.

SyntheticFi is the go-to resource for advisors borrowing with box spreads. From education to execution, SyntheticFi provides in-depth content, seamless implementation, and a powerful platform to help you maximize this powerful strategy. Learn more at syntheticfi.com.

^{1All rates mentioned in this article, including but not limited to, mortgage rates, prime rates, and box spread implied interest rates, are current estimates as of 2/24/2025.}

^{2As with any tax-related strategy, clients should consult a tax professional to ensure proper implementation. All tax codes cited are current as of 2/24/2025.}

^{3Assume 35% marginal income tax, 15% capital gains tax, and 10% combined state and city taxes.}

^{4Calculated with an initial margin percentage of 50% and a margin maintenance percentage of 30%; max loss without margin call is [1-50%/(1-30%)] = 28.57%. These percentages are common for most stocks, mutual funds, and ETFs, but check with your custodian for exact margin requirements.}

^{5Not financial advice. Clients should consult with their investment or financial advisor to determine if these strategies are suitable for them.}

^{Investors interested in box spreads should familiarize themselves with the options market and consider working with financial professionals or tax advisors to optimize their use in practice.}

^{This article is part of Cboe’s Guest Author Series, where firms and individuals share their insights, strategies and ideas with the broader Cboe community. Interested in contributing? Email social@cboe.com or contact your Cboe representative to learn more.}

^{Disclaimer: There are important risks associated with transacting in any of the Cboe Company products or any digital assets discussed here. Before engaging in any transactions in those products or digital assets, it is important for market participants to carefully review the disclosures and disclaimers contained at: https://www.cboe.com/us_disclaimers/. These products and digital assets are complex and are suitable only for sophisticated market participants. These products involve the risk of loss, which can be substantial and, depending on the type of product, can exceed the amount of money deposited in establishing the position. Market participants should put at risk only funds that they can afford to lose without affecting their lifestyle. The views of any third-party speakers or third-party materials are their own and do not necessarily represent the views of any Cboe Company. That content should not be construed as an endorsement or an indication by Cboe of the value of any non-Cboe financial product or service described.}