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How to Arbitrage from Funding Fees in Perpetual Swap Trading?

People who have traded perpetual swaps know that the core difference between perpetual swaps and other types of derivatives is that perpetual swaps do not have expiration dates. Under such circumstances, exchanges usually implement a funding rate mechanism which helps balance the short and long positions of perpetual swaps by either incentivizing or discouraging traders.

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Huobi Global launched a funding rate arbitrage product for perpetual swap trading this week, enabling traders to gain profits from high-yielding funding fees while optimizing their investment strategies. For users who are new to the market, understanding such an arbitrage product may be difficult. This article teach you how to use the product step by step.

🔹What is Funding Fee?

Funding rates play a critical role in the perpetual swaps market because they help balance the demand for the short and long side of perpetual swaps, keeping the contract price in line with the spot price at all times.

Funding rates vary as the prices of the underlying assets turn bullish or bearish. Traders will either pay or receive funding rates depending on their open positions: when the funding rate is positive, the longs should pay the shorts, and vice versa. Huobi Futures calculates the funding rate three times a day.

🔹How to arbitrage funding fees?

The launch of the new funding rate arbitrage product allows traders to gain funding fees through subscribing to an asset product based on its annual percentage yield and funding rates (current term and next term.)

The process involves 1) purchasing a certain amount of the asset in the spot market and 2) opening a short position of the asset in the futures market.

The price movement will offset the profit and loss originating from the spot and futures market, allowing traders to earn funding fees right after every funding rate calculation without having to close their positions.

🔹Four steps to gain funding fees

Step1: Log in to Huobi Futures, click [Information] on the navigation bar and select [Real-time funding rate] to enter the homepage.

➡️Web access, click here

➡️ APP access, click here

Step 2: Select an asset that you would like to trade. Take “DOGE” as an example.

Step 3: Purchase the asset (DOGE) in the spot trading market by clicking the green button shown below.

Step 4: Open a short position for this asset at the perpetual swap trading market. Make sure the position amount equals the asset amount you purchased in the spot market.

See, it’s easy! Log in to Huobi Futures and have a go, Happy trading!

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