No. of Recommendations: 4
The prices of the identical XSP and SPY call options are the same because both do NOT get the dividend.

Good point.

The question was about the implied interest rate, which I took as a comparison between buying SPY outright and buying the ITM call.

Perhaps it depends on how you look at it.
I don't look at it that way, as buying the stock vs. buying the option. I look at the way I understood Jim's explanation.
To wit, and with actual numbers:
With XSP at 337.42, the 250 call is 87.42 in the money.
If you pay 90.42 for it (midpoint of bid/ask), you are paying net only $3.00. Because if it closes at 337.42 you will get $87.41 back ($337.42 - $250).

So in essence you are paying $3.00 to borrow $177.84 for almost 2 years (672 days).
(Strike - underlying price + cost) / (underlying price - cost) * # of years
=
(250 - 337.42 + 90.42) / (337.42 - 90.42) * (365/672)
=
(3.00 / 247.00) * (0.54)
=
= 0.0065970214 = 0.6597% = 0.66%



And perhaps it is not comparing like to like.
Considering this position as a leverage play, broker margin rate is around 10%. Compared to half of 1% for this option position.

Whichever way you effectuate the leverage, there is always the risk that the leverage will work against you when/if the price goes down. However, with a deep ITM call you cannot lose more than your initial investment. And you will lose that much only if XSP closes below 250.

Maybe this is an example of what Scott Adams calls two movies on one screen. You can look on it as the difference between the stock (total return) vs. the call (price-only return). Or you can look on it as the difference between buying leverage at broker margin rate vs. buying leverage at a relatively small fixed price. Etrade margin rate is 10%. InteractiveBrokers is 3%. And those rates are not fixed.

Remember, unlike typical call option plays (like the 6/3 call strategy that Elan has mentioned) we are not looking for a lottery ticket. Rather, we are investing with a small(ish) amount of leverage -- 2X to 3X.

Right now the marget is closed. Etrade shows the XSP Dec'21 250 call as 85.96 bid and 95.96 ask. And says the theoretical value is 95.62. You could probably buy it for 3/4 inside the spread, about 93.

Interesting bit about the quotes....
The Feb'2020 250 call is 82.48 & 92.48, and the Dec'2021 250 call is 85.96 & 95.96. The midpoint is not that much different for the option that expires in 1 week vs. the option that expires in 2 years. You are borrowing the same amount of money and paying almost the same price, but there is a huge difference in the length of time of the outstanding loan.

Paying $3 to borrow $247 for 2 years is almost free.

## 2/14/2020
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