Perpetual Profits: Basis Trading with Perps
Perpetual Profits: Basis Trading with Perps
Collecting Funding with Swaps that Never Sleep
Contents:
What is Basis Trading?
Funding Payments
Synopsis:
Basis trading in the crypto market involves exploiting the delta between spot and perpetual swap prices, providing arbitrage opportunities in perpetual swap markets.
Coin-and-carry trades involve buying an asset in the spot market and shorting its perpetual contract, earning funding payments when the funding rate is positive.
Reverse coin-and-carry trades can be deployed when the perpetual contract is trading at a discount, by longing the perpetual contract and shorting spot on a margin exchange.
What is Basis Trading?
The term “basis” refers to the discrepancy between the price of a derivative and its underlying asset.
In traditional financial markets, a cash-and-carry trade involves buying an asset (often a commodity) and shorting its futures contract, when the futures contract is trading at a premium.
Basis trading is a futures trading strategy that aims to exploit this delta. Perpetual swap markets are fertile grounds for prospectors seeking to take advantage of this arbitrage opportunity.
Doing so affords the trader delta neutrality, shielding them from price fluctuations while they collect an arbitrage profit equal to the basis minus their carrying costs.
In the context of crypto markets, this arbitrage is (or at least should be) referred to as a coin-and-carry trade.
It involves buying an asset in the spot market and shorting its perp. When the perp is trading at a premium relative to spot, there is more long demand than short demand.
Funding Payments
When you short a perp when the funding rate is positive, longs pay funding payments to shorts (i.e., you receive funding payments from your counterparty).
Funding payments serve as a counterpoise of sorts — designed to reduce demand imbalances between longs and shorts.
When you trade $SOL, $BTC, and $ETH perps on Zeta, you can look at funding rates atop Zeta’s UI to inform your strategies.
When the perpetual contract is trading at a discount, a reverse coin-and-carry trade can be deployed by longing the perpetual contract and shorting spot on a margin exchange.
