Contract spread strategy
Nov 21, 2024
Profit mode:
It is easy to understand, and it is more intuitive than the previous strategies, that is, to earn the difference between two contracts that expire at different times.
That is, the strategy buyer buys a long-term contract and sells a recent contract at the same time, thus realizing arbitrage.
It should be noted that in spread positions, traders want the value of long positions to increase relative to short positions.
In addition, the expiration dates of the two legs are different. The short-term contract expires first, and the long-term contract expires later. The pricing rule is: spread price = forward contract price–recent contract price.
The buyer's perspective of the strategy is "buy contract spread", that is, buy forward contracts and sell recent contracts at the same time.
The seller's perspective of the strategy is "selling contract spread", that is, selling forward contracts and buying recent contracts.
Transaction details:
This strategy is universal, and it is suitable for all kinds of market. Assuming that the buying delivery or perpetual contract is leg 1 and the selling equivalent contract with different maturity dates is leg 2, the basic rules to be followed in the transaction are as follows:
1) the number of legs = 2, that is, this strategy has only two legs.
2) Trading instruments = delivery or perpetuity
3) Number of legs 1 = Number of legs 2
4) Maturity date of leg 1 ≠ Maturity date of leg 2, that is, the maturity dates of the two legs are different, and there is no expiration date for eternity.
5) the trading direction of leg 1 ≠ the trading direction of leg 2, that is, the trading directions of leg 1 and leg 2 are opposite, one is to buy and the other is to sell.
6) Target assets of leg 1 = Target assets of leg 2
Tip 1: About the net strategic price.
Net strategic price = leg buying price–leg selling price
Tip 2: About two types of contract spreads.
Perpetual vs delivery: One leg is a perpetual contract.
Delivery vs delivery: both legs are delivery contracts.
Specific transaction examples:
Suppose the spot price of Bitcoin is $38,000, the contract price of Bitcoin in the current quarter is $40,000, and the contract price of Bitcoin in the current month is $39,000. The strategy at this time should be to buy the current month's contract and sell the current season's contract.
Assume that the corresponding specific operation cases are as follows—
Leg 1: Buy the bitcoin contract of the month.
Leg 2: Selling Bitcoin contracts in the current quarter
The support of this strategy is that the contract price will coincide with the spot price. However, the two legs in this strategy are not spot trading, so we will face the risk that the contract price of the current season and the contract price of the current month will be in line with the spot price, which will cause the trader to suffer losses.
Typically, once the contract expires in the current month, investors either buy a new contract to continue the trading of leg 1, or close the position of the current contract to end the whole transaction.
Simply put, let's take one month later, that is, the expiration date of the contract in that month as an example:
At this point, we can choose to close the transaction, and the contract price of the current month (leg 1) has coincided with the spot price, but the contract price of the current quarter has not. In this case, the profit of this strategy depends more on the fluctuation of the forward contract price. In other words, the spread between the forward contract and the spot price determines the ultimate profit of investors.
If the contract price in the current month is higher than the spot price on the expiration date, assuming that it is $40,200, then the contract price in the current quarter will also be higher than the spot price, assuming that it is $43,000. In this case, the price difference between the two is even higher than at the beginning of the transaction.
The corresponding profit and loss situation is as follows-
Leg 1 income: 40,200–39,000 = 1,200 USD.
Leg 2 income: 40,000–43,000 =-3,000 USD.
Total income: 1200–3000 =-1800 USD.
If the contract price in the current quarter is only slightly higher than the spot price, it is assumed to be $40,100. In this case, the price difference between them is smaller than at the beginning of the transaction.
The corresponding profit and loss situation is as follows-
Leg 1 income: 40,200–39,000 = 1,200 USD.
Leg 2 income: 40,000–40,100 =-100 USD.
Total income: 1200–100 = 1100 USD.
The current price of Leg 2 is still $42,000, because the increase of contract price and spot price in this quarter is consistent, and the price difference between them is equal to that at the beginning of the transaction.
The corresponding profit and loss situation is as follows-
Leg 1 income: 40,200–39,000 = 1,200 USD.
Leg 2 income: 40,000–42,000 =-2,000 USD.
Total income: 1200–2000 =-800 USD.
As the maturity date approaches, the price difference between the contract and the spot usually tends to be the same. However, the speed and extent of the forward contract to bridge this spread directly affects the profit rate of the transaction.
Recommend Apps
