Research Summary
The report provides a practical guide on executing a cash and carry trade on Deribit, using Bitcoin and USDC as examples. It explains the process of buying Bitcoin in a spot market, selling a futures contract at a higher price, and waiting for the difference between the spot price and the future to decrease. The report also discusses the concept of staying delta neutral, the behavior of futures contracts, and the potential risks and returns of cash and carry trades.
Key Takeaways
Understanding Cash and Carry Trades
- Concept of Cash and Carry Trades: The report explains the process of executing a cash and carry trade, which involves buying an asset in a spot market and selling a futures contract at a higher price. The trader then waits for the difference between the spot price and the future to decrease, after which they close their futures short and sell the remaining asset back into the original currency.
- Delta Neutral Strategy: The report emphasizes the importance of staying delta neutral in cash and carry trades. This means that the trader is indifferent to whether the price of the asset increases or decreases, as they will still end up increasing the amount of the original currency they hold in their account.
Behavior of Futures Contracts
- Price Differences in Futures Contracts: The report notes that futures contracts often trade at a price different from the spot price of an asset. Usually, futures trade at a premium to spot, but this premium decreases over time until it disappears at expiration. This behavior can be exploited in cash and carry trades.
Executing a Cash and Carry Trade
- Steps to Execute a Cash and Carry Trade: The report provides a step-by-step guide on executing a cash and carry trade, from buying the asset in the spot market to selling the futures contract and waiting for the price difference to decrease. It also discusses the importance of choosing the right contract for the trade and managing the risks involved.
Risks and Returns of Cash and Carry Trades
- Risks and Returns: The report highlights that cash and carry trades are slow, low percentage return trades with very low risk and predictable returns. It also notes that while the profit is relatively small, the trader can achieve this profit with no delta risk.
Actionable Insights
- Consider Cash and Carry Trades: Traders looking for small, consistent, low-risk gains may consider cash and carry trades as a strategy. This type of trade can be an attractive place to allocate capital that would otherwise not be earning any yield.
- Understand the Behavior of Futures Contracts: Traders should understand the behavior of futures contracts, particularly how they often trade at a price different from the spot price of an asset. This knowledge can be used to exploit opportunities in cash and carry trades.
- Manage Risks Effectively: Traders should manage the risks involved in cash and carry trades effectively. This includes choosing the right contract for the trade and staying delta neutral to ensure that they are indifferent to price movements of the asset.
