Advanced Strategies in Perpetual Contracts Arbitrage

CHOOSING AN ARBITRAGE STRATEGY

Cryptocurrency futures arbitrage strategies allow you to profit from the price differences of the same asset traded on different markets: spot and futures.

Each strategy is suitable for different situations and levels of experience, and requires consideration of factors such as liquidity and risk.

In this section, we will touch on the question of which strategy is best suited for whom.

7.1 SPOT + FUTURES STRATEGY (BUYING ON SPOT AND SHORTING ON FUTURES)

The Spot + Futures strategy is one of the main strategies in futures arbitrage. It involves buying an asset on the spot market and simultaneously opening a short position on futures:

This combination creates profit when the futures price is higher than the spot price, and we earn from their convergence. This happens because futures contracts are often valued higher than current spot prices due to traders' expectations of the future price of the asset.

Brief Guide

1. Finding an arbitrage pair: use a futures screener to detect a pair where the futures price is higher than the spot market price (how to set up a futures screener and find a profitable pair was discussed in section Ⅱ)

2. Assessing the asset trend: to enter a trade, it is important to assess whether the asset is rising or falling to understand where to open a position on the spot or futures first.

3. Checking futures trade settings: make sure that isolated margin and leverage are indicated (we recommend working with leverage no higher than 1x)

4. Entering the trade on two markets: purchase the asset and go short for the same amount (considering the rules described in section Ⅳ)

5. Monitoring price convergence: track until the futures price approaches the spot price. Also, consider the funding rate (if it is positive, it will add income; if negative, it will increase expenses)

6. Closing positions: as soon as the prices converge or the difference between them decreases to 0.1% - 0.2%, close the position, locking in profit after deducting commission costs.

Example Calculation

Assume the spot price of an asset is $1000, and the futures price is $1100 (spread 10%), where we entered the position.

Below we will consider the most common situations that can be encountered:

1. The asset price rose and the prices converged. The token rose to $1200, and its price on the spot and futures converged. Then the spot profit is $200 and the futures loss is $100. Total profit from the pair +$100 or +4.76%:

2. The asset prices did not fully converge. The token price on the spot market is $1150, and on the futures market, it is $1200. Then the spot profit is $150, and the futures loss is $100. Total profit from the pair +$50 or +2.38%:

3. The asset price fell and the prices converged. The token price fell to $850. Then the spot loss is $150, and the futures profit is $250. Total profit +$100 or 4.76%:

NOTE: the examples above do not include the funding rate and commissions and, of course, with 1x leverage. Such simple templates will help you better understand the mechanics. It should also be noted that we have listed common scenarios, but not all. Sometimes, the trading pair on different markets may behave unpredictably and take a long time to converge in price. Therefore, you should consider such risks in your work to manage capital effectively.

Who is suitable for Spot + Futures arbitrage

1. For beginners. This type of trading is optimal for those who are just starting to master futures arbitrage.

2. For those who trade with minimal risk. The mechanics of this type of arbitrage involve hedging risks by buying the asset on the spot market. In simple terms, if the token rises, the loss on the futures contract will be offset by your spot purchase.

7.2 FUTURES + FUTURES STRATEGY (LONG POSITION AND SHORT POSITION)

This strategy uses arbitrage exclusively between futures markets:

This is a fairly flexible type of trading, as it allows the use of leverage as one of the mechanisms to increase profitability. In addition, leverage is often used by traders with a small deposit, as borrowed funds from the exchange allow opening more positions and entering trades with amounts exceeding their capital.

NOTE: please approach the choice of leverage size wisely. We do not recommend working with high leverage, as this increases the risk of liquidation.

Brief Guide

1. Finding an arbitrage pair: use a futures screener to detect a pair where a short position is opened where the asset is more expensive, and a long position is opened where it is cheaper (how to set up a futures screener and find a profitable pair was discussed in section Ⅱ)

2. Analyze funding rates: one of the most profitable situations is where the funding rate is negative on the buying exchange (where we open a long position) and positive on the selling exchange (where we short)

3. Assessing the asset trend: to enter a trade, it is important to assess whether the asset is rising or falling to understand where to open a position in a long position (long) or short position (short) first.

4. Checking futures exchange settings: always check what type of margin you have set and adjust the leverage (we recommend working with leverage no higher than 1x)

5. Entering the trade on two markets: open positions on two exchanges for the same amount (considering the rules described in section Ⅳ)

6. Monitoring price convergence: track until the futures price approaches the spot price. Also, consider the funding rate (if it is positive, it will add income; if negative, it will increase expenses)

7. Closing positions: as soon as the prices converge or the difference between them decreases to 0.1% - 0.2%, close the position, locking in profit after deducting commission costs.

Example Calculation

Assume that on one exchange, the futures price is $1350, and on another, it is $1500. Moreover, the funding rates are fixed: negative (-0.23%) on the first exchange and positive (+0.15%) on the second. And we entered the trade with 1x leverage.

Below we will consider two common scenarios:

1. The token price rose and the prices converged. The asset rose in price to $1800 at the convergence of prices. In this case, the long profit is $450, and the short loss is $300. The profit from the long and short is $150. And the funding income for three settlement cycles is $16.425. Total profit is +$166.425 or +5.8%:

2. The asset prices did not fully converge. The asset value in the long position is $1600, and in the short position, it is $1550. In this case, the long profit is $200, and the short loss is $100. The profit from the long and short is $100. And the funding income for three settlement cycles is $16.425. Total profit is +$116.425 or +4%:

3. The token price fell and the prices converged. The asset fell in price, and the futures converged at the level of $1250. In this case, the long position incurs a loss of $100, and the short position earns a profit of $250. Thus, the profit from the long and short is $150. And the funding income for three settlement cycles is $16.425. Total profit is +$166.425 or +5.8%:

NOTE: the scenarios with examples above do not include commissions. Such simple templates will help you better understand and predict possible price behavior. In addition, the main scenarios are listed here, but not all. As is known, token prices can take a long time to converge, so consider these risks in your work.

Who is suitable for Futures + Futures arbitrage

1. Experienced traders. When working with this type of arbitrage, you need to have certain skills in working with futures and leverage.

2. If you have a small capital. Through leverage, you can enter trades with amounts exceeding your own capital.

3. Those who are willing to take on higher risks. Due to the potential of leverage, you can achieve higher profitability, but with this approach, your risks increase significantly.

7.3 FUTURES + SPOT STRATEGY

This strategy is useful for investors who already own certain tokens and want to additionally earn on the temporary price difference:

The essence of this strategy is to sell the asset on the spot market if its price is higher than the futures price, and simultaneously open a long position (long) on the same token.

In addition, this type of arbitrage can be used to exit a trade, trading according to the Spot + Futures strategy (buying on the spot and selling on the futures), by setting up the screener accordingly.

Brief Guide:

1. Assessing assets: check which assets from your portfolio you would like to earn from;

2. Finding an arbitrage pair: using the screener settings, fill in the fields, including the whitelist, to find pairs (how to set up a futures screener and find a pair was discussed in section Ⅱ)

3. Selling the asset on the spot: when an arbitrage opportunity arises, sell the asset on the spot market

4. Opening a long position on the futures: after selling on the spot, open a long position (long) with the same amount of the sold asset

5. Monitoring price convergence: ensure that the futures price difference equals or approaches the spot market rate

6. Closing the position: when signs of price convergence or minimal divergence appear, close the position.

7. Purchasing the asset on the spot: after making a profit, you can purchase the token again for a larger amount (due to the profit) if you plan to hold it further.

Example Calculation

Assume that for one of the long-term holding tokens, a pair is found where the spot price is $200 and the futures price is $180. Moreover, the funding accrual on the futures exchange is (-0.15%), and the token quantity is 1000 units.

In this case, we sell the asset on the spot for $200 and go long with 1x leverage. When the futures price reaches $200, we close the trade with a profit of +$20:

Considering the funding income, such a trade will bring +$20.81 or +10% profit. Moreover, this profit can be used immediately to purchase the token to increase the emission volume and have a significant increase in the position if the token rises in the future.

NOTE: this example does not include commissions. Consider this in your work.

Who is suitable for Futures + Spot arbitrage

Long-term holders: investors who hold tokens for a long time can earn on their tokens using arbitrage opportunities.

Thus, each of the considered strategies offers you opportunities to profit from arbitrage, taking into account the level of experience and capital of the trader. The choice of strategy depends on the understanding of the market, the acceptable level of risk, and skills.