Spot-Futures Arbitrage Strategy Report
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Futures price reflects the market sentiment of the subject’s price. Whenever there is market volatility, the spot price will deviate from the futures price significantly. The larger the difference between the two prices (basis), the better the opportunity for traders to arbitrage.
Under normal circumstances, quarterly futures contracts will have a larger basis than weekly and bi-weekly futures contracts, due to the fact that more uncertainties are expected for a farther delivery date. Therefore, we will use quarterly futures as an example in this report.
If we look at the chart above, we can see that the basis peaked at 581.7 on July 10, then fell down to -121.64 on July 17, and rallied back to the 100–200 range.
By plotting a graph of basis range versus time (hour), we learn that the basis of this contract in July lies between 100–200 most of the time.
Execution
Buy 1,000 USDT-worth of BTC on the spot market, transfer all to your futures account and open 10 short quarterly contracts, which equal $1,000. All positions remain delta-neutral. The BTC price change does not affect the final yield.
If you hold only BTC in your account, you may borrow USDT from margin trading, then implement the same procedure above. However, due to the interest accrued during the process, your final yield will be lower.
Case 1
Starting with 1,000 USDT as capital, opening spot-futures arbitrage position at 11:00 on July 10. Close the position when negative basis occurs at 0:00 on July 17 and calculate the yield:
Case 2
Starting with 0.1 BTC as capital, borrow 1,000 USDT at margin trading and open spot-futures arbitrage position at 11:00 on July 10. Close the position when negative basis occurs at 0:00 on July 17 and calculate the yield.
Risks
- Basis
If the basis did not decrease but kept increasing, we might see a temporary loss in the portfolio. However, the basis will eventually go to zero when contract delivery is about to happen. - Volatility
If the size of your position is huge, extra time will be required for order matching. Your cost will be affected by the variance of basis during the process. - Price of USDT
The market sentiment on USDT vs USD is unfavorable. Opening a position at spot means selling USDT for USD. - Forced Liquidation
No liquidation risk for using USDT as capital. For traders who borrowed USDT through margin trading, they may need to add margin from time to time to avoid a margin call due to volatility.
Improvements
- Conduct a more detailed analysis on the basis by using minute instead of hour as the unit.
- Analyze the market by using market data to find a better time to open and close positions for profit. For example, since negative basis occurred twice in July, we may consider opening positions during negative basis and close the positions after it reverts to positive.
- The BTC profit cannot be transferred to your spot account before delivery. To avoid BTC price volatility, we can hedge the positions by using margin or futures trading.
- Use API trading for best opening/closing positions time.
This post originally appeared on Medium. Read more.
Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involves significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.
About OKEx
OKEx is a world-leading digital asset exchange headquartered in Malta, offering comprehensive digital assets trading services including token trading, futures trading, perpetual swap trading and index tracker to global traders with blockchain technology. Currently, the exchange offers over 400 token and futures trading pairs enabling users to optimize their strategies.
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