Investing in T-bills (Part 8)

The last table in Part 7 shows pricing data for synthetic long stock (SLS) positions in SPX: a combination of different expirations and strike prices. This brings me to a shocking revelation.

Walking the chain reveals loss from holding the SLS position. This means looking forward in time to get an idea what pricing will be like if “all else remains equal.” 91 days from now, the Sep position—now 182 DTE with a cost of $76.90—will be 91 DTE. Looking at the 91 DTE option chain (hence “walking the chain”) today (Jun expiration) shows the Jun 5275 SLS costs $21.10. 63 days after that, the Sep position would be like today’s Apr position with 28 DTE: established for an $18.40 credit. What I originally purchase for $76.90 will cost me an additional $18.40 to close in 154 days. That represents a loss of $76.90 + $18.40 = $95.30 or $9,530 per contract.

Say what?

The risk graph provides confirmation:

The purple line on 3/21/24 shows a current PnL of -$219.59. The cyan line on 9/21/24 shows a PnL in 182 days of -$11,609.10. This is a loss of $11,389.53. The SLS saves $523,599 (cost of 100 shares) – $7,690 (cost of SLS) = $515,909 for a [all-else-remains-equal] cost of (11,389.53 / 515,900) * (182 / 365) * 100% = 4.43%/year of the capital saved.

Let’s review.

I have been exploring the idea of trading SLS + T-bills as a way to get equivalent long stock exposure and bond interest.

I just discovered that trading the SLS incurs a cost that offsets much of the interest paid by T-bills.

What we have is another instance [so often heard when studying investing/trading/finance] of “no free lunch.” Also coming to mind is “can’t eat your cake and have it too.”

I had been starting to think trading SLS and investing in T-bills might provide an edge over buying the long stock outright. Rather than a potential edge to be had, I now see it more like a detriment suffered if T-bills are not purchased while holding the SLS. As an option trader with lots of free cash, T-bills must be purchased to avoid missing out on what is basically free money. As a more traditional equity investor, while T-bills still appear to be the better deal (by roughly 0.47%), I’m not convinced going the SLS route is worth doing given the remaining considerations when comparing the two.

I’d be lying if I denied any presence of sour grapes right now. The Options Playbook says:

     > For… [SLS], time decay is somewhat neutral. It will erode the value of the option
     > you bought (bad) but it will also erode the value of the option you sold (good).

Nothing could be farther from the truth in today’s environment.

I will continue next time exploring why this might be.