CASH and CARRY
Here is a step by step guide on how to do a cash and carry trade on FTX.
A cash and carry trade (or basis trading) consists in taking advantage of the premium of a futures contract over the spot price. For example if Ethereum Futures are trading well above its Spot price (contango) you could perform an arbitrage and take advantage of this opportunity.
FUTURES CASH and CARRY
- Create an account on FTX with this link to get a 5% discount on your trading fees
- Buy N amount of a Spot asset, for example buy 1 ETH/USD for $2200
- Sell the same N amount of the Future, for example sell 1 ETH-1231 (Dec Future) for $2800
You have just locked in a 2800-2200 = $600 profit, or a ~22% premium, or a ~34% APY (Annual Percentage Yield) at the time of writing this guide – not bad! Your Spot is also functioning as collateral for your Future short position. Now you can:
- Wait until expiry, as the Futures and Spot price always converge to the same price when you approach to expiry, and profit from the 22% difference by closing both positions at the same time
- Keep an eye on the spread, it’s not uncommon that the spread goes to zero or even go negative (extra profit) well before the expiry date, allowing you to pocket the profit early and jump on a new cash&carry trade
This is all you need to do.
It’s more important to understand how to perform this arbitrage safely on an exchange than understanding the economic theories behind this trade. There is plenty of material online explaining why Futures and Spot price converge as you approach the future expiry date, and much more.
PERPETUALS YIELD FARMING
Q.: Futures are not trading high enough above Spot price at the moment to perform a profitable cash and carry, can I still generate returns?
A.: You can indeed. You can yield farm Perpetuals on FTX. It takes a few minutes every day but the final yield you can get is usually higher than standard a Cash and Carry trade on FTX.
As mentioned, when quarterly Future contracts expire, they settle using the underlying asset price at their expiry date. This causes Futures price to converge to the asset’s Spot price over time.
Perpetual swap contracts are contracts that don’t have an expiry date to push the price to converge to the Spot price. They are Perpetuals, they never expire. So what keeps the Perpetual contract price in line with the price of the underlying Spot price? Funding rates is the answer.
Funding rates are interest payments made between long and short positions on Perpetual swap markets. This interest payments are designed to keep Perpetual contract prices in line with the underlying Spot price.
- When the Perpetual price is above Spot price: funding is positive and long positions pay short positions an interest
- On the other hand when the Perpetual price is below Spot price: funding is negative and short positions pay long positions an interest
I think you got this already. Similarly to Futures Cash and Carry you can generate returns by yield farm using perpetuals. Here’s a tutorial on yield farming on positive rates:
- Create an account on FTX with this link to get a 5% discount on your trading fees
- Go to the https://ftx.com/funding page
- Download the CSV file, as per animation below
- Filter by highest rate (see animation)
- Make sure that:
- A USD or USDT market exist. In the animation below SRN has the highest rate but a SRN-USD or SRN-USDT market doesn’t exist
- You are happy with the spread of both the Spot and PERP market: a high interest with a very large spread is too expensive to trade. (The spread is the difference between the buy and sell price)
- You are happy with market liquidity. You can check the Orderbook, the latest trades and the total daily volume to have an idea of the overall market liquidity. High liquidity gives you tighter spreads, and overall better execution
- Sell N amount of Perpetual (TRU-PERP in the example below, 0,0193% hourly)
- Buy the same N amount in the Spot market (TRU/USD)
In our example above TRU-PERP 0,0193% hourly x 24 hours x 365 days gives you over 69% annualized yield – not bad, altough you can find even higher rates with a bullish market.
On FTX you will cash in the premium every hour. Remember that premiums change depending on market conditions, keep an eye on them to hunt for more farming opportuinites. If you yield farm every few day the annual yield you can get is very high, even when considering trading fees and spread not accounted for in the example above.
Money-saving tip: Disregard AMPL token for cash and carry on FTX as it undergoes a daily rebase that will end up modifying to total size of your Spot position.
IMPORTANT THINGS TO KNOW
This is more relevant for Futures Cash and Carry but nevertheless important to know even if you are a farming yields on FTX.
When you do a cash & carry trade your short Futures leg might generate a negative USD balance higher than $30.000 in case you are performing a large size cash & carry trade. You should be aware of the possible scenarios when you have spot margin enabled or disabled on FTX. No stress, we’ll cover this.
You should also consider the Basis Risk of the asset you are trading on and Collateral Weighting, we’ll discuss everything step by step.
FTX SPOT MARGIN ENABLED OR DISABLED?
In the “Settings” section of your FTX account you can choose to Enable or Disable Spot Margin:
What is the difference?
- FTX SPOT MARGIN TRADING ENABLED
PRO: If your short Futures position generates negative USD you will not be liquidated because your margin would remain largely the same as the Spot price will increase and offset the loss on your Future position. However keep an eye on the FTX Collateral Weighting and Basis Risk, we’ll discuss it later on.
CON: with spot margin enabled you will pay interests on any negative USD balance. Borrowing on USD is usually cheaper than premiums on Futures however it’s worth knowing.
Consider this option for large trades, if you are tight collateral, if you are trading on a far away expiry.
- FTX SPOT MARGIN TRADING DISABLED
PRO: With spot margin trading you will NOT pay interests on negative USD balances, up to $30.000.
CON: However if you breach the -30k negative threshold FTX will convert your non-USD collateral to USD. With spot margin disabled there are other 2 scenarios where you can get liquidated:
- You are close to liquidation: your account’s margin fraction is less than (20bps + maintenance margin fraction requirement). –Less relevant for a 1:1 cash and carry trade but worh understanding
- Your negative USD balance is large when compared to overall collateral: its magnitude is over 4 times larger than your net account collateral. -Unlikely but worth understanding
Consider this option if you are experimenting with a cash & carry where your chances to go negative over 30k$ are close to nil.
PRO TIP: the -30k$ treshold is applied to each subaccount. You can create multiple sub-accounts and spread multiple cash and carry trades across them if a sinlge 30k$ treshold is not enough for you.
FTX COLLATERAL WEIGHT
If you think your Future price might decorrelate wildly from the Spot price you want to leave some spare collateral on your account. We have just introduced our last topic, see below.
Spot and Futures prices have a strong correlation, however this correlation is sometimes not linear. For instance, on a strong bull run the Future price might grow much more than the Spot price. Keep in mind the pair might decouple even more from your entry price overtime. If you are using high leverage, tight margins, large size, far away Futures expiries this is something you want to keep an eye on.
ESTIMATED LIQUIDATION PRICE
Once your positions are open, have a look at your Wallet > Positions section. As a rule of thumb, it is better not to use leverage when performing the cash and carry trade on an asset with zero collateral weighting value. This gives you a liquidation price very far from entry level.
If you are performing your cash and carry on FTX with a crypto that has collateral weight the liquidation level will be extremely comfortable. See below an example of a 10x leveraged perpetual short trade where the market (mark price = current price) has already doubled since open price. Despite that, the market has still to go up 350% before approaching the estimated liquidation price.
This cash and carry trade has been performed on a sub-account with 1000$ on it, generating an average of 10 cents per hour, or a 90% APR as of May 2021, see below. Remember that a negative payment in your funding section means you are receiving the payment if you hold a short PERP-position, vice versa if you are long.
Tip here & make a wish if this was helpful
USDT (ERC20): 0x196ADCD11CBB8697F52Bf1a1076BbB5038b8Fa47
USDT (TRON, TRC20): TBpeni1VYjxahiyC2G55bnkfxVLEkXPqfe
Disclaimer: This is not financial advice. I am not affiliated with FTX. Do your own research and make sure you understand all FTX terms and conditions