Calendar spread arbitrage is a common hedging practice that takes advantage of discrepancies in extrinsic value across 2 different expiration contracts of the same token, in order to make a risk-free profit.

What is Calendar Spread Arbitrage Strategy

Futures price reflects the market sentiment of the subject’s price. In the futures market, a different settlement time contract of the same token will differ. For example, at writing time, the mark price of BTC quarterly contract is USD 10,033.3, while that of the bi-weekly contract is USD 9,973.88.

In this report, we will refer to the price difference between a quarterly contract and a bi-weekly contract as “spread”:

Spread = Quarterly contract price — bi-weekly contract price

Futures price would fluctuate under influence of different market factors, and the true range (spread fluctuate range) of futures with different expiration date will also change. For example, at writing time, the BTC quarterly contract price dropped 1.35% while the bi-weekly dropped 1.06%.

To earn a guaranteed profit from calendar spread arbitrage, spread must fluctuate within the two positions the trader takes, which can be predicted from historical trading records.

Execution

As shown from the above examples, the amount of profit one can gain from calendar spread arbitrage is only related to the “spread” of different contracts instead of price. When the market is bullish, use long arbitrage; when the market is bearish, use short arbitrage. In this way, you can guarantee a stable profit despite market volatile. The benefit of a futures spread is that the trader has taken two positions. This allows them to earn a guaranteed profit from the exercise of both positions.

But how do we know the distribution of the spread?

The charts below show the changes of OKEx quarterly and bi-weekly contract on the 30-minute candlestick chart between Jul 23 and Aug 22, and the spread between Jul 1 to Jul 22:

If you wish to start arbitrage on Jul 23, you’d need to understand the spread distribution from the historical spread data between Jul 1 and Jul 21. The above graph shows that the spread mostly fluctuates between [-50,250] within [70,100]. Hence, you could set USD 100 as the resistance and use the grid trading strategy.

Here’s how to perform grid trading:

1. Under USD 100 Interval

To execute:

2. Above USD 100 Interval

To execute:

According to the above execution, the arbitrage strategy would be:

3. Notes

i. For easier calculation, the above trade uses the close position price on a 30-minute candlestick chart and the USD 50 tier trading strategy; in a month’s time, the yield would be 0.89%. Arbitrage trading can be executed via preset orders, therefore we can use 10-minute or 5-minute intervals and select grid trading position as USD 10 to raise the yield;

ii. As the calendar spread arbitrage strategy only takes note of the size of the spread but not the price, under cross margin mode, the gain or loss of the contracts of an account can be replaced with the profit of another futures contract, therefore, using calendar spread arbitrage under cross margin mode is less likely to be forced-liquidated, hence traders can use a higher leverage.

iii. Grid trading has both pros and cons:

  • Setting interval (USD 100 as interval):

If the interval was not set within the boundary but at the peak of fluctuation (e.g. setting USD 300 as interval would take longer for user to gain profit, or they might even experience losses). The setup of interval directly determines the yield within a certain time frame;

  • Time cost:

Using grid trading is guaranteed to profit, yet the time it takes is usually longer than other arbitrage strategies.


Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involves significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.


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