Traders work after a Federal Open Market Committee (FOMC) meeting on the American Stock Exchange (AMEX) floor of the New York Stock Exchange (NYSE) on Wednesday, September 16, 2026, in New York, USA.
Michael Nagle | Bloomberg | Getty Images
If there are 99 problems in the U.S. Treasury market, the sudden rise in popularity of certain types of options trading may be the least talked about.
An option strategy commonly referred to as a “box spread” combines four options with two strike prices. One is a bullish call spread and the other is a bearish put spread. S&P500 index — Creates a market-neutral position where the price at execution is the cash received by the seller or borrower and the fixed value at expiration is the total amount received by the buyer or lender. The difference between the two represents the interest paid to the lender.
This is as close to the risk-free income that the derivatives market provides, but as an added bonus, because it is an equity derivative product, it falls into the lower tax rate category of capital gains on interest income.
Last Friday, total open box trade loans in S&P 500 options hit an all-time high of $146 billion, according to CBOE Global Markets data compiled for CNBC. Average daily notional value trades exceeded $2.3 billion last month, an increase of 26% year-on-year, with retail traders accounting for $54 million in daily trades.
Currently, the S&P box spread returns more than 4.4% using a contract that expires in three months. By comparison, the interest rate on three-month U.S. Treasuries is less than 4%, and the overnight SOFR rate is around 3.9%.
“We are seeing increased usage from ETF sponsors and wealth advisors, as well as some large retail accounts, who have determined that the effective interest rate is above alternative rates on both the lending and borrowing sides,” Henry Schwartz, vice president of Derivatives Market Intelligence, said in an email.
Once thought of as a clever but complex strategy reserved for high-end institutional investors and big banks, it has gone mainstream as exchange-traded funds package trades into low-cost vehicles and retail investors and advisors become accustomed to options-based strategies.
Total assets under management of at least three ETFs that track trades – the largest being Alpha Architect’s $15 billion in 1-3 months Box ETF (BOXX) – is approximately $20 billion.
Alpha Architect 1-3 Month Box ETF Year-to-date
While the amount may pale in comparison to the $30 trillion U.S. Treasury market, the widening box spread speaks to the wisdom of financial advisors and individual investors seeking alternatives to traditional fixed income assets and what they call “tax-aware” strategies. It also undoubtedly puts pressure on the Federal Reserve to raise interest rates to compete with what is being offered in other asset classes.
There may be one problem. That is, the larger the trade, the more government attention it will receive. In July, the Treasury Department said it was looking at investment strategies aimed at avoiding the U.S. tax system. Reuters said box spread funds are being considered like other tax-saving strategies used by advisers.
No new rules have been announced for the trade, but some bond watchers are concerned that its growing popularity could siphon capital that would otherwise be allocated to the bond market.
“Box spreads have been around for a long time, but liquidity is no longer a constraint because the volume of all types of options is increasing,” said one financial adviser, who asked not to be on the record until the government clarified its position on box ETFs. “You can have different iterations of derivatives that historically were more likely to go into bonds or cash.”
