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Calendar spread arbitrage is a common hedging practice that takes advantage of discrepancies in extrinsic value across two different expiration contracts of the same token, in order to make a risk-free profit.
What Is Calendar Spread Arbitrage Strategy?
Futures price reflects the market sentiment of the subject’s price. In the futures market, a different settlement time contract of the same token will differ. For example, at time of writing, the mark price of BTC quarterly contract is USD 10,033.3, while that of the bi-weekly contract is USD 9,973.88.
In this report, we will refer to the price difference between a quarterly contract and a bi-weekly contract as “spread”:
Spread = Quarterly contract price?—?bi-weekly contract price
The futures price would fluctuate under the influence of different market factors, and the true range (spread fluctuate range) of futures with a different expiration date will also change. For example, at time of writing, the BTC quarterly contract price dropped 1.35% while the bi-weekly dropped 1.06%.
To earn a guaranteed profit from calendar spread arbitrage, the spread must fluctuate within the two positions the trader takes, which can be predicted from historical trading records.
As shown in the above examples, the amount of profit one can gain from calendar spread arbitrage is only related to the “spread” of different contracts instead of price. When the market is bullish, use long arbitrage; when the market is bearish, use short arbitrage. In this way, you can guarantee a stable profit despite market volatile. The benefit of a futures spread is that the trader has taken two positions. This allows them to earn a guaranteed profit from the exercise of both positions.
But how do we know the distribution of the spread?
The charts below show the changes of OKEx quarterly and bi-weekly contract on the 30-minute candlestick chart between July 23 and August 22, and the spread between July 1 to July 22.
If you wish to start arbitrage on July 23, you’d need to understand the spread distribution from the historical spread data between July 1 and July 21. The graph above shows that the spread mostly fluctuates between [-50,250] within [70,100]. Hence, you could set USD 100 as the resistance and use the grid trading strategy.
1. Under USD 100 Interval
2. Above USD 100 Interval
According to the execution above, the arbitrage strategy would be:
i. For an easier calculation, the trade above uses the close position price on a 30-minute candlestick chart and the USD 50 tier trading strategy; in a month’s time, the yield would be 0.89%. Arbitrage trading can be executed via preset orders, therefore we can use 10-minute or 5-minute intervals and select grid trading position as USD 10 to raise the yield.
ii. As the calendar spread arbitrage strategy only takes note of the size of the spread but not the price, under cross margin mode, the gain or loss of the contracts of an account can be replaced with the profit of another futures contract. Therefore, using calendar spread arbitrage under cross margin mode is less likely to be forced-liquidated, hence traders can use a higher leverage.
iii. Grid trading has both pros and cons:
- Setting interval (USD 100 as interval):
If the interval was not set within the boundary but at the peak of fluctuation (e.g. setting USD 300 as an interval would take longer for a user to gain profit, or they might even experience losses). The setup of interval directly determines the yield within a certain time frame.
- Time cost:
Using grid trading is guaranteed to profit, yet the time it takes is usually longer than other arbitrage strategies.
This post originally appeared on OKEx Blog. 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 involve 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.
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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