I think the specific choice of SPX (the S&P 500) here doesn’t matter too much, but presumably it’ll be good because it’s something that gets traded on a lot.
The liquidity isn’t the only reason.SPX has European-style options. If you tried this on SPY instead, you’d be exposed to early-assignment risk.SPX is not the only index with European options, but it is the most liquid.
I’m unlikely to make use of this myself, not living in the US and not having that kind of money to invest.
You can adjust the width of the boxes to borrow a smaller amount. And the XSP mini options are one-tenth the size of the SPX options. They’re not as liquid though. Some brokers take international customers.
To explain/sanity check why I think it doesn’t make sense for me personally to do this:
A thing the UK has is ISAs, which are accounts that you can put a certain amount into per year and not pay tax on your gains (or interest, for fixed-interest ISAs). The limit is something like £15k. One of my ISAs lets me invest in various stock indices, but not individual stocks, and I’d be surprised if there was one that let you pull off a trick like this.
Separately, any money I put into my pension lets me reclaim the income tax I already paid on it. Then I think I need to pay tax when withdrawing it, but some of it is tax free and the rest will be at a lower rate unless I withdraw a lot or have other income. (Or I guess if the rules change, which is maybe a possibility I should take more seriously.) My pension also lets me invest in stock indices.
So as I understand it, the bulk of what I invest should (and currently does) go to an ISA or pension. It’s probably not harmful to put moderate amounts in the kind of broker that would let me do this trick, because I only pay capital gains tax if my gains are above some threshold. But I suspect the intersection of “enough money it’s worth doing this trick with” and “not so much that I should just have it in an ISA” is either empty, or narrow enough to be only barely worthwhile.
(I’d also need to figure out where to put the money I’ve borrowed. We have current accounts that pay a few % on up to a few £k, but for large amounts the best safe investment I can think of is maybe premium bonds. That’s a lottery that pays 1.4% interest on average, tax free. You can invest up to £50k in them. But then doing it with a smaller amount is riskier, because there’s more chance that I don’t earn enough.)
The liquidity isn’t the only reason.
SPX
has European-style options. If you tried this onSPY
instead, you’d be exposed to early-assignment risk.SPX
is not the only index with European options, but it is the most liquid.You can adjust the width of the boxes to borrow a smaller amount. And the
XSP
mini options are one-tenth the size of theSPX
options. They’re not as liquid though. Some brokers take international customers.To explain/sanity check why I think it doesn’t make sense for me personally to do this:
A thing the UK has is ISAs, which are accounts that you can put a certain amount into per year and not pay tax on your gains (or interest, for fixed-interest ISAs). The limit is something like £15k. One of my ISAs lets me invest in various stock indices, but not individual stocks, and I’d be surprised if there was one that let you pull off a trick like this.
Separately, any money I put into my pension lets me reclaim the income tax I already paid on it. Then I think I need to pay tax when withdrawing it, but some of it is tax free and the rest will be at a lower rate unless I withdraw a lot or have other income. (Or I guess if the rules change, which is maybe a possibility I should take more seriously.) My pension also lets me invest in stock indices.
So as I understand it, the bulk of what I invest should (and currently does) go to an ISA or pension. It’s probably not harmful to put moderate amounts in the kind of broker that would let me do this trick, because I only pay capital gains tax if my gains are above some threshold. But I suspect the intersection of “enough money it’s worth doing this trick with” and “not so much that I should just have it in an ISA” is either empty, or narrow enough to be only barely worthwhile.
(I’d also need to figure out where to put the money I’ve borrowed. We have current accounts that pay a few % on up to a few £k, but for large amounts the best safe investment I can think of is maybe premium bonds. That’s a lottery that pays 1.4% interest on average, tax free. You can invest up to £50k in them. But then doing it with a smaller amount is riskier, because there’s more chance that I don’t earn enough.)