How To Borrow Money With No Interest Without Using Credit Cards
This has nothing to do with Chicago real estate but it's so interesting that I thought I would share it with you. Aside from real estate, investing is one of only two hobbies that I have and the other hobby doesn't get much attention.
You've heard how low interest rates are right now. In fact you have heard that short term interest rates are near 0%. But what rate can you borrow at? Credit card rates are still in the double digits while mortgage rates are just under 4% (not bad but only good for buying a house). You can effectively borrow at 0% interest through a promotional credit card balance transfer but the amount you can borrow and the duration of that loan are fairly limited. As an investor you can borrow against your investments for about 8.5% - at least that's what Fidelity tells me. It's called borrowing on the margin and considering that the loan is 100% collateralized by highly liquid investments that's pretty expensive. So how do you borrow at this 0% interest that everyone is talking about?
I recently stumbled upon a way to effectively borrow money at zero interest through my investment account using an options trading strategy. You see various financial instruments are priced according to the institutional cost of borrowing money and options are one of those financial instruments. And apparently the underlying interest rate on which the options are priced is damn near zero.
Before I go into how this options trading strategy allows you to effectively borrow money at 0% interest I need to emphasize a few caveats:
- This technique is not for everyone. You need to really understand stock options and have experience trading them. This is a fairly sophisticated technique.
- Obviously you need an options trading account.
- As you will see you also need to have investments in the account equal to the amount you are planning on "borrowing".
- As you will find out you also need to be very careful what kind of stocks you trade these options on. Stocks that pay decent dividends and stocks that have a huge short interest are not good candidates.
- This strategy only gives you a zero interest rate right now while the federal reserve is keeping interest rates so low. Once rates go up the cost of this borrowing strategy goes up with them.
- There is a risk that the options you sell in this strategy could be exercised on you and you have to deliver or receive the stock at the strike price. If that happens you can make the appropriate adjustments but it does raise the cost of the strategy and it can be a pain in the ass.
- I'm just trying to highlight the opportunity here. I don't have the time to spell out every last nuance (and there are many) of executing this strategy.
If that list of caveats isn't enough to scare you away then you should read on.
This "borrowing" technique actually uses a trading strategy that is well known among options aficionados but probably not commonly thought of as a way to borrow money. It is called a net credit box spread - net credit because you receive cash as a result of the trade - the cash you are effectively "borrowing". The way it works is you simultaneously sell a put and buy a call at a strike price well above the current stock price and buy a put and sell a call at a strike price well below the current stock price. Thus the puts and calls you sell are deep in the money and generate cash for you - at least until expiration. Your broker is OK with you doing whatever you want with this money as long as you have enough other investments in the account to cover the eventual expiration of the options in the event that you don't replace the cash.
Here is an example of how this strategy would work today using Apple stock which is currently trading at $487.75, pays no dividends, and has heavily traded options:
- Sell the May 550 put at $72.125
- Buy the May 550 call at $9.90
- Sell the May 450 call at $52.675
- Buy the May 450 put at $14.85
The net proceeds of this transaction are $72.125 - $9.90 + $52.675 - $14.85 = $100.05 x 100 shares = $10,005. At expiration the value of this position is exactly equal to $10,000 regardless of the price of the stock (it's called a flat position) so that is what you will have to pay out to close the position. So in effect you had the use of $10,000 from today until May 19 and you actually get to keep $5. In reality the spreads on a trade like this are big enough that it might actually cost you a small amount. And of course you can trade more than one contract each to "borrow" more money.
The reason you want to stay away from stocks that pay significant dividends or have a huge short interest as these situations mess with the options prices and could significantly impact the economics of the strategy - or introduce unpleasant surprises.
What do you think?