Ok this post might get a little technical for some people, but I'm genuinely looking for reasons not to do this or reasons to support doing this.
I've got a portfolio of around $1.3M and I'm considering creating a short box trade that essentially costs 4% simple per year over 3 years. It would create a $260k position and eat about 1/3 of my margin allowance. This would cost me roughly $10k per year to maintain. The cost would be a capital loss.
With the proceeds I plan to invest 100% in a municipal bond fund for my state like NQP that yields 8.3%.
I should make around $10k per year tax free from this, AND write the $30k box trade loss off against, capital gains in 3 years time (I do about $30k per year in options income.
I would therefore make about $10k per year for 3 years and in my final year wash 30k of capital gains with the box trade cost.
Risks.
1. Interest rates spike and my municipal bond fund takes a dive. Interest rates are likely to go down a bit, not up.
2. I cannot use margin safely in this account - although I think I could still do the options trades I need to.
3. Interest rates fall heavily, and my box trade is not optimal, I could have done 1 year and created a new box trade with a lower cost. Does not really matter because it's fixed when held to maturity.
I'm leveraged, but the box trade is neutral so risk free. My risk mostly lies with the Municipal Bond fund right?