“Every hour, each perpetual contract has a funding payment where longs pay shorts if perpetual is trading at a premium to index, and shorts pay longs if trading at a discount. This funding payment is equal to TWAP ((Future—Index ) / Index) / 24. ”
Regarding the claim that PERP contracts systematically trade above the spot, I’d say that in the past few months it’s been true for maybe 60% of the time? It really depends on the coin and the market sentiment. So the funding rate (which updates every hour) can vary a lot or even go negative (meaning that longs pay shorts) a few hours per day. I personally leave PERP contracts for short-term directional trades that I close in less than 24 hours. And so I’d do this arbitrage on quarterly futures [e.g. BTC-0326 is expiring in a few days and still trading at a small premium] so I can lock in the premium for the duration of the trade. At one point in the past few weeks, BTC-1231 traded 20% above spot! Which isn’t so unusual in crypto actually..
This seems silly. Perpetual futures generally trade at a much higher annualized premium to the underlying than quarterly futures. Also, quarterly futures regularly experience significant changes in the amount of contango, so it is possible to lose money if you are forced to exit early. Also, even if the amount of contango remains unchanged, if you are long the spot and short the quarterly, and the underlying goes up, you will have a negative USD balance that will either result in liquidation or paying spot borrow rates on USD.
So the quarterly version of the trade is a lot riskier and pays a lot less. Thanks.
“Every hour, each perpetual contract has a funding payment where longs pay shorts if perpetual is trading at a premium to index, and shorts pay longs if trading at a discount. This funding payment is equal to TWAP ((Future—Index ) / Index) / 24. ”
Source: https://help.ftx.com/hc/en-us/articles/360024780791-What-Are-Futures-
Regarding the claim that PERP contracts systematically trade above the spot, I’d say that in the past few months it’s been true for maybe 60% of the time? It really depends on the coin and the market sentiment. So the funding rate (which updates every hour) can vary a lot or even go negative (meaning that longs pay shorts) a few hours per day. I personally leave PERP contracts for short-term directional trades that I close in less than 24 hours. And so I’d do this arbitrage on quarterly futures [e.g. BTC-0326 is expiring in a few days and still trading at a small premium] so I can lock in the premium for the duration of the trade. At one point in the past few weeks, BTC-1231 traded 20% above spot! Which isn’t so unusual in crypto actually..
This seems silly. Perpetual futures generally trade at a much higher annualized premium to the underlying than quarterly futures. Also, quarterly futures regularly experience significant changes in the amount of contango, so it is possible to lose money if you are forced to exit early. Also, even if the amount of contango remains unchanged, if you are long the spot and short the quarterly, and the underlying goes up, you will have a negative USD balance that will either result in liquidation or paying spot borrow rates on USD.
So the quarterly version of the trade is a lot riskier and pays a lot less. Thanks.
Really good points, with which I agree.
Coincidentally, Arthur Hayes just wrote about this: https://cryptohayes.medium.com/all-aboard-4d50435190d6