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

  1. Create an account on FTX with this link to get a 5% discount on your trading fees
  2. Buy N amount of a Spot asset, for example buy 1 ETH/USD for $2200
  3. 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:

  1. Create an account on FTX with this link to get a 5% discount on your trading fees
  2. Go to the https://ftx.com/funding page
  3. Download the CSV file, as per animation below
  4. Filter by highest rate (see animation)
  5. 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
  1. Sell N amount of Perpetual (TRU-PERP in the example below, 0,0193% hourly)
  2. Buy the same N amount in the Spot market (TRU/USD)

That’s it.

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.

BASIS RISK

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

ETH: 0xFac48dBc88d4432E68dBe00f8003308BdBbbb167

BTC: 36R9f6pSfCHr8azYv4gyqGMLqpbQUvyyqj

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

👇 QUESTIONS? ASK BELOW 👇

20 Comments

  1. Thanks that’s very useful. Do I understand ok if I say that for cash and carry trades where the collateral weighting is low it makes sense to leave some spare USD on the account just in case?

    Liked by 1 person

    1. Hi Josh, if you have spot margin disabled you can go negative USD balance up to -30.000$. It depends on the size of your hedge. For instance, if you are using around 10.000$ per long and short position it is basically impossible to breach that level. If you plan to trade in a larger size then more collateral will help.

      Like

  2. Hey I don’t think you can do the cash and carry on FTX as all futures are USDT settled and collateral is also in USDT…at least not in the way you can do it on binance with coin-m futures.

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    1. hey Mik, Binance allows you to trade on coin settled futures however on the flip side premiums (therefore returns) are generally lower compared to FTX. With a little effort you can get better yields on FTX, just compare yourself 🙂

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      1. The thing is those better yield are with coins that are not 1:1 in leverage.
        I used GRT. I bought 123 GRT, then try to short 123 GRT but it didn’t let me. Max short was 101GRT. Had to sell in spot those 22GRT, and the USD equivalents of that sale I can’t touch them as they are collateral.

        And another thing is that even though I am 0.92x leverage it still has a liquidation price (like 14x times more than current price but still).

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      2. Hi Mik, to keep things simple I did not include info on leverage in this guide. Using leverage can be risky. If you want to use leverage to increase yields you have to make sure you are doing the right calculations and you have to keep an eye on the liquidation level displayed next to your open position. Cryptos with high collateral weighting will give little issues in terms of liquidation levels. Other assets with 0 collateral weighting will give you much closer liquidation levels if you use high leverage. Start with a comfortable size before increasing your cash and carry position.

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      3. Thanks for answering.

        I am not doing trade with leverage..
        You cannot perform this trade organically as the programming of FTX doesn’t “realize” that you are long on the asset that you are shorting. So if you have 4 btc and you short 3, you will still have a liquidation price on that short position even though you will have 1 BTC as free collateral.

        It doesn’t work very well and they don’t explain this issue nowhere. They sent me to this link to see especifications but I can’t make out how would one arrive to the liq price.:.https://help.ftx.com/hc/en-us/articles/360027668832-Contracts-Specs

        So you if you want minimal risk you only have to use a fraction of your balance to have a very high liquidation price.

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      4. Not exactly. That is correct only for coins with collateral weighting value = 0. With Bitcoin, you can allocate 50% long and 50% short of your account value and the liquidation price will be very, very far away. Keep in mind that you want to have the same long size as collateral not only to have a comfortable liquidation level but most importantly to offset the losses you will incur on the short leg in a bullish market. I have updated the guide with a new section called “ESTIMATED LIQUIDATION PRICE” to provide more insights, thanks for your feedback!

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  3. Hi can I check if you would usually allow futures to settle, or close the positions prior to settlement date? The issue that I potentially forsee is the drop in liquidity closer to futures expiry date and hence the slippage involved. Understand that in the prior, there may be some settlement fees involved but prob negligible compared to potential slippage in the latter. Many thanks.. Jer

    Like

    1. Hi Jer, that’s a good question. As mentioned in the PERP yield farming section, the yield you can get is just one side of the trade, liquidity and therefore spreads being the other. It makes little sense to get into a cash and carry trade if you expect to pay large spreads to get in and out because of lack of liquidity.

      This can be a problem with PERP futures however FTX assets offered as standard Futures (i.e. Futures with an expiry date) are much more liquid and spreads are less of a concern for cash and carry trades.

      Once the cash and carry trade is locked you want to wait for the right moment to close it, and that’s generally well before Future expiry (market selloff due to China mining centralization FUD or recent Elon tweets for instance). You can then rinse and repeat with another hyped asset and get a much better APR.

      Going back to your question as a rule of thumb volumes flip from the front contract to the next around 10 days out from front contract expiry. This doesn’t mean that the volumes on the expiring contract will be horrible however I wouldn’t wait till the very last day to close my cash and carry.

      There is no perfect answer to your question but I hope you now have a better understanding of some of the dynamics at play – as always this is not financial advice.

      Like

      1. How do you calculate the profits when closing the trade earlier (from exp date) ?

        Say in period t0
        Spot = 10 Future= 20

        Period t+1

        Spot 12 Future = 16

        Closing at t+1 what would be the profits here?

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  4. Hi Mik,

    I am assuming you are performing the cash and carry trade by going long (buying) the Spot and going short (selling) the Future, like in the example above.

    Your P&L will look like:

    Spot: you bought at 10, you sell at 12 = profit 2
    Future: you sold at 20, you buy back at 16 = profit 4

    Total P&L = 6 profit

    We are completely ignoring the bid/ask spread in this example to keep things easy. In liquid assets that’s absolutely fine to do, in less liquid assets the bid/ask spread will eat a small part of the profit you previously locked in with the cash and carry trade.

    Still worth doing, but worth knowing.

    Like

    1. Hi Admin,
      When you talk about bid/ask spread you mean the spread between PERP and SPOT or the spread in each orderbook? Is there a formula, with that in to account, to check de viability of the trade? I’d like to make this auto with a bot and would be awesome to have it.
      Thanks for the site!

      Like

      1. Heya, the bid/ask spread is the difference between the price you sell (bid) and the price you buy (ask) a crypto or any asset in general. When you perform a cash & carry trade that’s something you have to take into account too. Very liquid assets like Bitcoin have extremely low bid/ask spreads (but are usually less suitable for cash& carry trades on PERP). Anyway if you plan to hold long term the bid/ask difference is negligible – hope this helps with your cash and carry on FTX!

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  5. Hi… If you deposit say $100K in dollars to do the basis trade.(buy spot and sell futures)..you can see your dollars disappear from the wallet and your future position increasing….You can see the futures position but where can you see the btcusd you bought?….secondly doing 1 to 1 is safe but how would you do it 2 to 1 to gain double your yield and what is costs to look for?

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    1. Hi David, in chronological order:
      1) You deposit let’s say $100k
      2) You buy let’s say 1.5 BTC cash, you will see your USD balance decrease and you will see 1.5 BTC sitting in your wallet.
      3) You sell 1.5 BTC future, your USD balance further decreases and in your positions section you see a short position with a corresponding indicative liquidation level too.
      Obviously you can do 3) before 2) as well, as long as you are quick to take position in both sides, to avoid the market moving too much while you place your trades.
      To answer your last question: anything not 1 to 1 is not hedging, you are taking a directional position on the exceeding side of the trade which is different from a cash and carry trade.

      Like

  6. Hello, Thanks for the website.
    Does it also make sense to perform a Cash and Carry buy buying 1 BTC perpetual and selling 1 BTC future? I see there are gaps in prices but not sure if the price of the two will converge at the expiration date.

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    1. Hi, the issue with a cash and carry between future and perpetual is that you will most likely pay funding on your long perpetual position. Holding a position where you pay funding for several days would make the cash and carry less profitable or even unprofitable.

      Like

      1. thanks for the insight. Looks like at least 105% of fund is required to buy 100% of spot BTC, then use that BTC as collateral to take short on BTC (margined enabled 95% ) . Is that the right scenario?

        Like

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