PreviousPrevious
Introduced the basic concept of hedging trading, this article will teach you three ways of hedging and arbitrage in the futures market.
Basis Hedging Arbitrage
The so-called basis is the price gap between the forward contract and the spot price. Let's look at the following picture:
This is OKEX's BTC 1225 forward contract. The contract price in the picture is $13747.4, and the spot price is $13545.11. The basis difference between the two is $202.29, and 1225 refers to the delivery date.
Since the BTC market sentiment is always biased towards bulls, the price of the forward contract is higher than the spot price most of the time. Since the forward contract will be delivered at the spot price in the end, as long as the basis difference is positive, we have a low-risk arbitrage opportunity , how to do it?
We can buy BTC spot (equivalent to doubling the amount of funds), and then short the same number of BTCs to arbitrage. As long as the short order is placed on delivery, no matter what the BTC price is at the time of delivery, the arbitrageur can earn "short coins" Number * Basis", the calculation formula is as follows:
Spot price x, basis y, contract expiration price z buy spot, short forward contract spot profit and loss = zx forward contract short order profit and loss = (x+y)-z sum of both = y (regardless of contract expiration price Why, will earn basis y)
Take the above picture as an example, buy 10 BTC spot, short 10 BTC 1225 contracts, after 52 days, sell the spot and close the short position, you can earn 10*$202.29 = $2022.9 profit, the annualized rate of return is 1.49 %/52*365= 10.4%.
The annualized rate of return of 10.4% sounds good, but when the market is extremely optimistic, there will often be considerable room for arbitrage. By implementing the above-mentioned arbitrage method, the annualized rate of return will be more than 30%–40%.
In addition to BTC, other currencies with a positive basis are also applicable, and the calculation method of the above rate of return is based on the situation that "spot can be used as margin". If the currency price rises, the increase in spot can offset the short position Loss, on the contrary, if the currency price falls, the short order profit can also offset the spot loss, and the effect of "profit and loss offsetting each other, long-term holding without liquidation" can be achieved.
At this time, the advantages of FTX are highlighted. FTX provides the most diverse margin options in the industry. As long as FTX has a quarterly contract, the following currencies can be arbitraged when the basis is large enough:
image descriptionFTX offers
Diversified Margin Options
The risk of this arbitrage method is very low. Unless the exchange runs away, it will basically not lose money. At most, there will be a temporary loss due to the expansion of the basis during the position holding process. Basically, it will still make money when it is delivered, which is also full. The arbitrage method that institutions will choose.
Funding rate arbitrage - spot hedging
This arbitrage method is similar to basis arbitrage, the difference is that basis arbitrage shorts forward contracts, while funding rate arbitrage shorts perpetual contracts. By holding a spot position and shorting a perpetual contract with a positive funding rate Renew the contract to receive the funding rate.
What is Funding Rate?
The funding rate is the price anchoring mechanism of the perpetual contract, and the intention is to make the price of the perpetual contract as close as possible to the spot.
1. When the price of the perpetual contract is higher than the spot price, the funding rate will be positive, and the long position holders must pay the short position holders at regular intervals. Since the long position will need to pay all the time, this will encourage the long positions to close their positions , or attract arbitrageurs to sell short, thereby lowering the contract price and approaching the spot price
2. When the price of the perpetual contract is lower than the spot price, the funding rate will be negative, and short position holders must pay fees to long position holders at regular intervals. Since holding short positions will require continuous payment, this will encourage short positions to balance positions, or attract arbitrageurs to go long, thereby raising the contract price and approaching the spot price
It should be noted that the funding rate is not a handling fee charged by the exchange, and these fees are only transferred between long and short parties.
The funding rate of some currencies has been positive for a long time. At this time, we can buy spot + short perpetual contracts to hedge the risk of price fluctuations and continue to receive funding rates. Just like basis arbitrage, choose a currency that can be used as a margin in order to maximize the utilization rate of funds, and there is no need to prepare an additional margin for short positions.
Take the following picture as an example. From January to February this year, the author bought 17,000 USD in ETH spot and shorted the equivalent ETH perpetual contract, and he could receive 2–3 USD per hour (negative value=receive money). The author held the empty order for a whole month, and earned more than 2,000 US dollars under low-risk conditions, and the converted annualized rate of return exceeded 100%.
The risk of this arbitrage method mainly comes from the possibility that the direction of the funding rate may change. Generally speaking, if a currency is in a bullish trend and the market has a strong long-term sentiment, then the funding rate is more likely to be positive for a long time. However, if the market sentiment suddenly changes If you turn long to short, the funding rate may turn negative, and you will have to pay for holding short orders, so it is very important to choose the right currency.Google SheetIf you want to see the funding rates of various currencies on FTX, Long Ge, an enthusiastic FTX group member, will help you make one.
Table, you can query the direction of the funding rate of each currency in the past 1000 hours in the table, so that you can filter the currency suitable for arbitrage.
Generally, the exchange pays the funding rate once every 8 hours (BitMEX, Binance, and Bybit are all), and only FTX pays once every hour. This is a great boon for arbitrageurs, because the funding rate arbitrage is the most feared It is the rate change. If the fund rate is expected to be positive in the first 7 hours of holding the position, but it turns negative suddenly in the last hour due to bad luck, then 1/3 of the day will be wasted. Compared with FTX The rate design is more reasonable.
Funding rate arbitrage - contract hedging
The picture below is an arbitrage hedging order of the author. At the same time, I am long the perpetual contract of the EXCH index and short the 1225 quarterly contract. Since the EXCH funding rate has been in negative value recently, the author is holding a long position of the EXCH perpetual contract. You can always get money. You can notice that the forced liquidation price shown in the figure is infinity, which means that no matter how the price of EXCH changes, the probability of liquidation is extremely low because the profit and loss of long and short positions roughly offset each other.
EXCH contract hedging order
image description
Do more EXCH and get paid every hour
This arbitrage method has two advantages. The first is that leverage can be used to increase the utilization rate of funds. The second is that it can be done regardless of whether the funding rate is positive or negative. Unlike spot arbitrage, you must choose a currency with a long-term positive funding rate. kind.
However, the risk is also the highest among the three arbitrage methods. In some special cases, the prices of the quarterly contract and the perpetual contract will not move in unison (for example, the perpetual contract falls, but the quarterly contract rises), or the basis is just right for arbitrage At this time, if the profit and loss of the long and short positions cannot be offset by each other, a loss will occur, and if the loss is too high, the position may be liquidated.
Take the EXCH hedging order in the above picture as an example. Due to the narrowing of the contract basis, the author has a floating loss of more than 100 US dollars. The loss has already been earned back.
If you want to do contract hedging, it is recommended that the leverage ratio after adding up long and short positions should not be higher than 5 times, and try to find a target with a smaller price difference between the perpetual contract and the quarterly contract, so as to reduce the loss caused by the narrowing of the basis , the Google Sheet made by Brother Long provides basis data, and it is recommended to find currencies below 0.5% to arbitrage.
For the first two spot hedging methods, if your billing amount is relatively large, and you happen to be in a situation of losing money on empty orders and making money on spot, the USD balance in your wallet may reach more than -30000, and FTX will automatically sell the spot for you by default. Add USD to avoid too much negative USD, but users can also choose not to automatically convert, and only pay interest on the part exceeding -30000 (0.1% per day), which can beset upset up
Page settings, the author recommends that those who have a large amount of hedging can choose to open it first.
That’s all for this article, and the next article will talk about the arbitrage method of FTX option derivatives-Move contract.If you have not registered FTX, welcome to use the author'sreferral link
, in addition to the permanent 5% handling fee discount, you can also get an additional $25 handling fee discount coupon.If you find my article helpful, you are welcome to subscribe to the author'sTelegram channel
